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Magazine Problem 7
The treasurer of a major U.S. firm has \(\$ 30\) million to invest for three months. The annual interest rate in the United States is .25 percent per month. The interest rate in Great Britain is .41 percent per month. The spot exchange rate is \(拢 .54\), and the threemonth forward rate is \(拢 .53\). Ignoring transaction costs, in which country would the treasurer want to invest the company's funds? Why?
Problem 10
Suppose the spot and six-month forward rates on the Norwegian krone are \(\mathrm{Kr} 6.84\) and \(\mathrm{Kr} 6.96\), respectively. The annual risk-free rate in the United States is 4 percent, and the annual risk-free rate in Norway is 7 percent. 1\. Is there an arbitrage opportunity here? If so, how would you exploit it? 2\. What must the six-month forward rate be to prevent arbitrage?
Problem 12
Suppose the spot and three-month forward rates for the yen are \(楼 118.15\) and \(楼 116.32\), respectively. 1\. Is the yen expected to get stronger or weaker? 2\. What would you estimate is the difference between the inflation rates of the United States and Japan?
Problem 13
Suppose the spot exchange rate for the Hungarian forint is HUF 209 . The inflation rate in the United States is 3.5 percent per year and is 5.7 percent in Hungary. What do you predict the exchange rate will be in one year? In two years? In five years? What relationship are you using?
