PROBLEM SET #1 1.Suppose interest rates in US and Japan are 7% and 9% per-year.

If spot rate is 142/$ and 3-month forward rate is 139/$. a. Is there arbitrage opportunity? b. How much profit? Show steps to arbitrage.. 2.Between 1988 and 1991, the price of a room at the Milan Hilton rose from Lit 346,400 to Lit 475,000. At the same time, the exchange rate went from Lit 1,302=$1 to Lit 1,075=$1 in 1991. By how much has the dollar cost of a room at the Milan Hilton changed over this three-year period? 3. Suppose todays spot exchange rate is $0.51/DM1. The six-month interest rates on dollars and DM are 13% and 6% respectively. The six-month forward rate is $0.5170/DM1. A foreign exchange advisory service has predicted that the DM will appreciate to $0.54/DM1 within six months. a. How would you use forward contract to make profit? b. How would you use borrowing and lending transaction to profit? c. What is the difference between a and b? 4. Suppose exchange rate Rp/$ currently at Rp9,000/$. Because of certain events, the rate quickly moves to Rp10,000/$. Central bank thinks that this new rate is not ideal, wants to move the rate back to Rp9,000/$. Using Demand Supply diagram, show how Central Bank could intervene the exchange rate. 5. At the beginning of 1989, interest rate in Jaoan is 4%, which is much lower than that in US. This significant interest rate differential prompts US property developers to borrow in yen to fund their projects. Do you agree? Comment on their actions. 6. Suppose 6-month forward rate is Rp10,000/$. Suppose we know for sure from crystall ball that spot rate 6 month from now is Rp11,000/$. a. Which parity we discusses? Does it hold b. How to profit from the situation above, explain. 7. Suppose we observe the following direct spot quotations in New York (US) and Toronto (Canada), respectively: 0.8000-50 and 1.2500-60. What are the arbitrage profits per $1 million? 8. Suppose $ is quoted as 145-8 in Tokyo, a. How much Yen to buy $1 million? b. Calculate direct quote of $ in New York. 9. Borrowing rate in Indonesia (Rp) is around 15%, while that in $ is 7%. Explain at least three reasons why this happens.

10. Suppose we have exchange rates among three currencies as follows: (fl is Dutch guilders) fl 1,9025/$ C$ 1,2646/$ fl 1,5214/C$

Is there arbitrage opportunity, and how to profit from the situation. 11. Suppose Rupiah depreciates againts yen by 15%, how much yen appreciates againts Rupiah? 12. Suppose exchange rate Chinese Yian and US$ moves from Yuan 8/$ to Yuan 12/$ in one year. Inflation in China is 20%, while inflation in US is 5%. a. Calculate change in nominal exchange rate b. Calculate change in real exchange rate .