Question: Foreign Exchange Rate Risk Homework Exercise 1. Suppose that the EUR:USD is trading at 1.2342; the GBP:JPY is trading at 67.7600; and the EUR:GBP is

Foreign Exchange Rate Risk Homework Exercise 1. Suppose that the EUR:USD is trading at 1.2342; the GBP:JPY is trading at 67.7600; and the EUR:GBP is trading at 0.8265. What should the USD:JPY rate be? 2. If a price index for US goods stands at 118.73 and the same price index for European goods (i.e., computed from the same consumption basket) stands at 183.34; what is the fair (under the theory of PPP) spot exchange rate EUR:USD. 3. Suppose that the EUR:USD spot exchange rate is $1.4625. The one year interest rate in the US is 0.55% and the one year interest rate in the Euro Zone is 3.15%. Calculate the one-year forward EUR:USD exchange rate. Assume that interest rate parity holds and that the interest rates quoted are simple rates with annual compounding. 4. The spot GBP:USD rate is being quoted by a dealer bank at 92/97. The figure is 1.60. What is the dealer's bid and what is the dealer's offer? 5. A dealer is quoting the 90 day forward rate for GBP:USD at 45/37. Based on the spot rates in D above, what is the dealer's "outright quote" for 90 day cable in terms of dollars.

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