2. Indirect Exchange Rate If the direct exchange rate of the euro is \$1.18, what is the euro’s indirect exchange rate? That is, what is the value of a dollar in euros? (1 point)
3. Cross Exchange Rate Assume Poland’s currency (the zloty) is worth \$.16 and the Japanese yen is worth \$.0092. What is the cross rate of the zloty with respect to yen? That is, how many yen equal a zloty? (1 point)
4. Foreign Exchange You just came back from Canada, where the Canadian dollar was worth \$.70. You still have C\$200 from your trip and could exchange them for dollars at the airport, but the airport foreign exchange desk will only buy them for \$.60. Next week, you will be going to Mexico and will need pesos. The airport foreign exchange desk will sell you pesos for \$.10 per peso. You met a tourist at the airport who is from Mexico and is on his way to Canada. He is willing to buy your C\$200 for 1,300 pesos. Should you accept the offer or cash the Canadian dollars in at the airport? Explain. (1 point)
5. Forward Contract Your company desires to avoid the risk from exchange rate fluctuations, and it will need C\$300,000 in 90 days to make payment on imports from Canada. You decide to hedge your position by purchasing Canadian dollar forward. The current spot rate of the Canadian dollar is \$.73 while the forward rate is \$.76. You expect the spot rate in 90 days to be \$.80. How many dollars will you need for the C\$300,000 in 90 days if you purchase Canadian dollar forward? (1 point)

Chapter 4

1. Percentage Depreciation Assume the spot rate of the British pound is \$1.30. The expected spot rate 1 year from now is assumed to be \$1.36. What percentage depreciation does this reflect? (1 point)
2. Inflation Effects on Exchange Rates Assume that the U.S. inflation rate becomes low relative to Canadian inflation. Other thing being equal, how should this affect

the (a) U.S. demand for Canadian dollars, (b) supply of Canadian dollars for sale, and (c) equilibrium value of the Canadian dollar? (1 point)

1. Interest Effects on Exchange Rates Assume U.S. interest rates increase relative to British interest rates. Other thing being equal, how should this affect the (a) U.S. demand for British pounds, (b) supply of pounds for sale, and (c) equilibrium value of the pound? (1 point)
2. Speculation Assume the following information regarding U.S. and European annualized interest rates: Currency Lending Rate Borrowing Rate
U.S. Dollar (\$) 6.73% 7.20%
Euro (€) 6.80% 7.28%

Trensor Bank can borrow either \$20 million or €20 million. The current spot rate of the euro is \$1.13. Furthermore, Trensor Bank expects the spot rate of the euro to be \$1.10 in 90 days. What is Trensor Bank’s dollar profit from speculating if the spot rate of the euro is indeed \$1.10 in 90 days? (2 point)

Sample Solution