On January 1, 2015, one U.S. dollar can be exchanged for eight foreign currencies (FC). The dollar can be invested short term at a rate of 4%, and the FC can be invested at a rate of 5%.
1. Calculate the direct and indirect spot exchange rates as of January 1, 2015.
2. Calculate the 180-day forward rate to buy FC (assume 365 days per year).
3. If the spot rate is 1 FC = $0.740 and the 90-day forward rate is $0.752, what does this suggest about interest rates in the two countries?
4. Explain why a weak dollar relative to the FC would likely increase U.S. exports.
5. Discuss what would happen to the forward rate if the dollar strengthened relative to the FC.