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International Finance - Exchange rates

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1. The $/Euro exchange rate is Euro= $0.95, and the Euro/SFr exchange rate is SFr 1 = Euro 0.71. What is the SFr/$ exchange rate?

7. In 1995, one dollar bought ¥80. In 2000, it bought about ¥110.

A. What was the dollar value of the yen in 1995? What was the yen's dollar value in 2000?

B. By what percent has the yen fallen in value between 1995 and 2000?

C. By what percent has the dollar risen in value between 1995 and 2000?

20. Suppose that three-month interest rates (annualized) in Japan and the United States are 7 percent and 9 percent, respectively. If the spot rate is ¥142:$1 and the ninety-day forward rate is ¥139:$1:

A. Where would you invest?

B. Where would you borrow?

C. What arbitrage opportunity do these figures present?

D. Assuming no transaction costs, what would be your arbitrage profit per dollar or dollar-equivalent borrowed?

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The solution provides answers to 3 questions on interest rates.

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1. The $/Euro exchange rate is Euro = $0.95, and the Euro/ SFr exchange rate is SFr 1 = Euro 0.71. What is the SFr/$ exchange rate?

SFr/$ = 1/ ($/Euro x Euro/ SFr) = 1/ (0.95 x 0.71) = 1.4826
1$ = SFr 1.4826

7. In 1995, one dollar bought ¥80. In 2000, it bought about ¥110.

A. What was the dollar value of the yen in 1995? What was the yen's dollar value in 2000?

1995 :
¥ / $ = 80 ; 1 $ = ¥ 80
Therefore, $ / ¥ = 1/ 80 = 0.0125; 1 ¥ = $ 0.0125

2000:
¥ / $ = 110 ; 1 $ = ¥ 110
Therefore, $ / ¥ = 1/ 110 = 0.0091; 1 ¥ = $ 0.0091

B. By what percent has the yen fallen in value between ...

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