International Financial Management
Comprehensive problem set
If one Swiss franc can purchase $0.71 U.S. dollar, how many Swiss francs can one U.S. dollar buy? And
If one U.S. dollar buys 1.0279 euros, how many
dollars can you purchase for one euro?
2. Currently, in the spot market $1 = 106.45 Japanese yen, 1 Japanese yen = 0.00966 euro, and 1 euro = 9.0606 Mexican pesos. What is the exchange rate between the U.S. dollar and the Mexican peso? 3. A currency trader observes the following quotes in the spot market: 122 Japanese yen
= 1 U.S. dollar
2.28 Swiss francs
= 1 British pound
1 British pound
= 1.6542 U.S. dollars
Given this information, what is the exchange rate between the Swiss franc (SF) and the Japanese yen? 4. One year ago, a U.S. investor converted dollars to yen and purchased 100 shares of stock in a Japanese company at a price of 3,150 yen per share. The stock’s total purchase cost was 315,000 yen. At the time of purchase, in the currency market 1 yen equaled $0.00952. Today, the stock is selling at a price of 3,465 yen per share, and in the currency market $1 equals 130 yen. The stock does not pay a dividend. If the investor were to sell the stock today and convert the proceeds back to dollars, what would be his realized return on his initial dollar investment from holding the stock? 5. A telephone costs $50 in the United States. Today, in the currency markets you observe the following exchange rates: 1 U.S. dollar = 1.0279 euros
1 euro = 8.1794 Norwegian krones
Assume that the currency markets are efficient and that purchasing power parity holds worldwide. What should be the price of the same telephone in Norway? 6. A computer costs $1,100 in the United States. The same computer costs 1,265 euros in Italy. Assuming that purchasing power parity (PPP) strictly holds, what is the spot exchange rate between the dollar and the euro? 7. A textbook sells for $75 in the U.S. market. Exchange rates are such that 1 British pound (£) equals $1.58 U.S. dollars. Assume that purchasing power parity holds, what should the textbook sell for in Britain? 8. A product sells for $750 in the United States. The exchange rate is such that $1 equals 1.0279 euros. If purchasing power parity (PPP) holds, what is the price of the product (in euros) in the EMU countries? 9. Hockey skates sell in Canada for 105 Canadian dollars. Currently, 1 Canadian dollar equals 0.71 U.S. dollar. If purchasing power parity (PPP) holds, what is the price of hockey skates in the United States? 10. A box of candy costs 28.80 Swiss francs (SF) in Switzerland and $20 in the United States. Assuming that purchasing power parity (PPP) holds, what is the current exchange rate? 11. In the spot market, 1 U.S. dollar can be exchanged for 121 Japanese yen. In the 1-year forward market, 1 U.S. dollar can be exchanged for 125 Japanese yen. The 1-year, risk-free rate of interest is 5.2 percent in the United States. If interest rate parity holds, what is the yield today on 1-year, risk-free Japanese securities? 12. The nominal rate of interest on six-month, risk-free U.S. securities is 6 percent. Currently in the spot market, $1 U.S. = 104.84 Japanese yen. In the six-month forward market, $1 U.S. = 104.84 Japanese yen. If interest rate parity holds, what is the current nominal interest rate on six-month, risk-free Japanese securities? 13. Suppose that 288 yen could be purchased in the foreign exchange market for two U.S. dollars today. If the yen is expected to depreciate by 8 percent tomorrow, how many yen could two U.S. dollars buy tomorrow? 14. One British pound can purchase 1.82 U.S. dollars today in the foreign exchange market and currency forecasters predict that the U.S. dollar will depreciate by 12 percent against the pound over the next 30 days. How many dollars will a pound buy in 30 days? 15. Suppose exchange rates between U.S....
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