Problem 1 Identical consumption baskets in Germany and Canada cost 11,224 Euros and 18,690 Canadian dollars respectively. Considering that purchasing power parity holds define the exchange rate between Euro and Canadian dollar under (a) direct quotation in Germany, (b) indirect quotation in Germany, (c) direct quotation in Canada, (d) indirect quotation in Canada. Problem 2 The following indirect quotation of Swiss franc to British pound is given: SFr / = 2.2714. The 1-year futures contract rate is set at the level of 2.2784. Interest rates in Britain and Switzerland are 4.7 % and 4 % respectively. Is there an interest rate arbitrage opportunity in this case? Describe the arbitrage transactions step-by-step. What the annual interest rate in Switzerland should be to disable the interest rate arbitrage? Problem 3 At the beginning of the year the exchange rate between Japanese yen and Euro under the indirect quotation equaled / = 134.52. Inflation levels in Japan and France were 3.2 % and 2.8 % respectively. What should the exchange rate between these two currencies at the year-end be so that the purchasing power parity would hold