Financial Market


Short questions:

1.- If you are an exporter who must make payments in foreign currency three months after receiving each shipment and you predict that the domestic currency will appreciate over this period, is there any value in hedging your currency exposure?

2.- The same computer costs $400 in the United States, €470 in Spain, £300 in the United Kingdom, and ¥120,000 in Japan. If the law of one price holds, what are the euro-dollar, pound-dollar, and yen-dollar exchange rates? Why might the law of one price fail?

3.- Can purchasing power parity help predict long-term movements in exchange rates?

4.- It has been mentioned that “After the creation of the eurozone, countries are not allowed to adjust their currency rates to gain competitiveness in their trading”.

Could you explain why adjusting the exchange rates some countries try to improve their trading balance?

5.-Are exchange rate changes necessarily good or bad for a particular company?


a.- If the price of a basket of goods measured in USD is 10% higher in Spain than in USA, which country´s currency is undervalued according to the purchasing power parity?

b.- You observe that the inflation rate in the United States is 2.3 percent per year and that T-bills currently yield 3 percent annually. What do you estimate the inflation rate to be in:

Japan if short-term Australian government securities yield 0 percent per year?

Canada if short-term Canadian government securities yield 5 percent per year?

Mexico if short-term Mexican government securities yield 8 percent per year?

c.- 1.-If the US dollar -Euro rate is 1.2 Dollars per Euro and the US dollar – British pound is 0.726 Dollars per pound.

What is the pound per Euro rate?

d.- Using the model of demand and supply for USD, what would you expect to happen to the USD exchange rate if in light of a worsening geopolitical situation, Americans view foreign bonds as riskier than before? (You should quote the exchange rate as number of units of foreign currency per USD)

e.- Suppose the spot exchange rate for the Canadian dollar is Can$1.05 and the six-month forward rate is Can$1.03.

Which is worth more, a U.S. dollar or a Canadian dollar?

Assuming absolute PPP holds, what is the cost in the United States of an Elkhead beer if the price in Canada is Can$2.19? Why might the beer actually sell at a different price in the United States?

Is the U.S. dollar selling at a premium or a discount relative to the Canadian dollar?

Which currency is expected to appreciate in value?

Which country do you think has higher interest rates—the United States or Canada? Explain.

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