Question: On January 1, one U.S. dollar can be exchanged for eight foreign currencies (FC). The dollar can be invested short term at a rate of

On January 1, 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.

2. Calculate the 180-day forward rate to buy FC (assume 365 days per year).

3. If the spot rate is 1 FC ¼ $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?

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