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Exchange Rates and Purchasing Power Parity

P19-1: EXCHANGE RATE If British pounds sell for $1.64 (U.S.) per pound, what should dollar sell for in pounds per dollar?

P19-2: CROSS RATE A currency trader observes that in the spot exchange market, 1 U.S. dollar can be exchanged for 3.50 Israeli shekels or for 77 Japanese yen. What is the cross-exchange rate between the yen and the shekel; that is, how many yen would you receive for every shekel exchanged?

P19-3: INTEREST RATE PARITY Six-month T-bills have a nominal rate of 4%, while default-free Japanese bonds that mature in 6 months have a nominal rate of 2.5%. In the spot exchange market, 1 yen equals $0.013. If interest rate parity holds, what is the 6-month forward exchange rate?

P19-4: PURCHASING POWER PARITY A television costs $500 in the United States. The same television costs 312.5 euros. If purchasing power parity holds, what is the spot exchange rate between the euro and the dollar?

P19-7: CURRENCY APPRECIATION Suppose that 1 Danish krone could be purchased in the foreign exchange market today for $0.20. If the krone appreciated 10% tomorrow against the dollar, how many krones would a dollar buy tomorrow?

P19-8: CROSS RATES Suppose the exchange rate between the U.S. dollar and the Swedish krona was 6.3 krona = $1 and the exchange rate between the dollar and the British pound was 1pound = $1.64. What was the exchange rate between Swedish kronas and pounds?

Solution Preview

19-1.) Exchange Rate = 1 British Pound/$ 1.64 = 0.609 Pound/Dollar

19-2.) 3.50 Israel Shekels
77 Japanese Yen
Cross Rate = 77 Yen / 3.50 Shekels = Yen 22 ...

Solution Summary

The Solution addresses the six questions about exchange rates, interest rates, and purchasing power.