Exercise $2($LO $2)$

Spot rates and forward rates. 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 exchangerates as of January$1.$

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

$3.$ If the spot rate is $1$ FC $14$ $$0\mathrm{.}740$ and the $90-$day forward rate is $$0\mathrm{.}752,$ what does this sug$-$

gest 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$.$