So here's another formula you may need from Ch 17.

rh= periodic interest rate in home country

rf= periodic interest rate in foreign country

Now give these a try:

(A) Assume that 90-day U.S. securities have a 4.5% annualized interest rate whereas 90-day Swiss securities have a 5% annualized interest rate. In the spot market, 1 U.S. dollar can be exchanged for 1.2 Swiss francs. If interest rate parity holds, what is the 90-day forward rate exchange between U.S. and Swiss francs? (see page 724 for the answer)

(B) A computer sells for $1,500 U.S. dollars. In the spot market, $1=115$1=115 Japanese yen. If purchasing power parity holds, what should be the price (in yen) of the same computer in Japan? (see page 727 for the answer)

(C) Suppose in the spot market 1 U.S. dollar equals 1.60 Canadian dollars. Six month Canadian securities have an annualized return of 6% (and thus a 6-month periodic return of 3%). Six month U.S. securities have an annualized return of 6.5% and a periodic return of 3.25%. If interest rate parity holds, what is the U.S. dollar-Canadian dollar exchange rate in the 180 - day forward market?

(D) Suppose 90 day investments in Britain have a 6% annualized return and a 1.5% quarterly (90 day) return. In the United States, 90 day investments of similar risk have a 4% annualized return and a 1% quarterly (90 day) return. In the 90 day forward market, 1 British Pound equals $1.65. If interest rate parity holds, what is the spot exchange rate?

(E) Suppose hockey skates sell in Canada for 105 Canadian dollars, and 1 Canadian dollar equals .71 U.S. dollars. If purchasing power parity (PPP) holds, what is the price of hockey skates in the United States?