Please submit a word file (or spreadsheet) with your answers to the following questions.
1. Sarah has $2,500 that she wants to invest in a European certificate of deposit (CD). The spot exchange rate (dollars per euro) is e$/€ =1.13 If the minimum investment required in the CD is €2,000, does Sarah have sufficient funds? If not, what is the shortfall (in Euros)? If so, how much surplus does Sarah have (in euros)? NOTE: This is not a multiple-choice problem. Show your work to receive credit for the problem.
2. Suppose the euro/Australian dollar exchange rate increases from 0.65 to 0.70 within a short period. Meanwhile, the Mexican peso/euro exchange rate rises from 15.71 to 16.27 during the same period. Identify the correct statement from the following.
a. The euro has appreciated against both the Australian dollar as well as the peso.
b. The euro has depreciated against both the Australian dollar as well as the peso.
c. The euro has depreciated against the peso and appreciated against the Australian dollar.
d. The euro has appreciated against the peso and depreciated against the Australian dollar.
3. Suppose an importer, who expects to receive his shipment of raw materials worth €15,000 in three months, enters into a forward contract where E€/$ is 0.80. If at the time of delivery of the raw materials E€/$ = 0.83, how much does the trader benefit/lose by entering into the forward contract?
a. He/she loses by $677.71
b. He/she gains by $677.71
c. He/she gains by $450
d. He/she loses by $450
e. He/she loses by $227.71
4. Suppose the spot Yuan/dollar exchange rate is 6.79. Sue, a Chinese national, has 10,000 Yuan that she wants to invest in a U.S. asset that promises an annual interest of 7 percent. If the expected exchange rate (Yuan/dollar) after a year is 7.2, how much will Sue earn in Yuan? You should include both the interest received and the gain or loss from exchange rate changes in answering this question.
a. 11,346.12 Yuan
b. 10,603.8 Yuan
c. 10,309.25 Yuan
d. 18,026.5 Yuan
e. 17,525.76 Yuan
5. A decrease in the expected exchange rate E$/£e causes:
a. no change in the spot exchange rate.
b. an increase in the rate of return on pound in the short run.
c. an increase in the rate of return on dollar in the short run.
d. a decrease in the rate of return on pound in the long run.
e. a pound depreciation and a dollar appreciation.
6. Ceteris paribus, an increase in the British (foreign) interest rates will make British pound investments _____ to investors, causing _____ in demand for pounds on the Forex.
a. less attractive; no change
b. more attractive; no change
c. less attractive; an increase
d. more attractive; an increase
e. more attractive; a decrease
7. Suppose that the current exchange rate between the U.S. dollar and the British pound is 1.464$/£. Now further assume that the expected inflation rate in the U.S. for the next year is 2.5% while the expected inflation rate in England is 3%. Considering relative purchasing power parity (PPP), what 1-year forward rate would we expect in terms of $/£? To solve this problem, use the equation from the Suranovic textbook equation for relative PPP in section 30-4. Show your work to receive full credit for this problem.
8. It has been argued that the exchange rate can be used as a policy tool. Assume that the U.S. government would like to reduce inflation. Which of the following is an appropriate action given this scenario?
a. Sell dollars for foreign currency
b. Buy dollars with foreign currency
c. Lower interest rates
d. None of the above
9. A wage-price spiral can occur when:
a. there is unemployment and an increase in money supply.
b. there is unemployment and low aggregate demand in the economy.
c. there is full-employment and low aggregate demand in the economy.
d. there is full-employment of resources and an increase in money supply.
e. there is unemployment and a decrease in money demand.
10. Suppose an investor invests in a savings account in England one year ago. At the time of investment, the investor converted $100,000 to pounds at an exchange rate of 1.404$/£. Assume the interest rate in England was 3% and today the investor is converting his/her savings balance (principal plus interest) to dollars when the exchange rate is 1.464$/£. How much money will the investor receive? (This is NOT a multiple choice question – show your work to receive full credit.)