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# Exchange Rate

1) Doug Wyatt is a currency trader for Global Currency Exchange Inc. Wyatt has compiled the following information concerning the U.S. dollar (\$) / Australian dollar (AUD) exchange rate.
- Spot bid rate: \$0.745
- 3-month forward bid rate: \$0.752
- 3-month forward ask rate: \$0.754

Which of the following statements concerning the currencies is CORRECT?

A) The AUD is selling at a forward discount of 4.83%.
B) The AUD is selling at a forward premium of 3.21%.
C) The USD is selling at a forward premium of 2.82%.
D) The AUD is selling at a forward premium of 4.83%

2) John Dolan, CFA, is an international fund manager with the Borderless Fund. Dolan is considering an investment in the country of Kenya. He is concerned with the inflationary environment in Kenya, but he feels that it is mitigated by the degree of high economic growth over the next year. Based on his research, Dolan found that Kenya is expecting inflation rates of 17 percent while the European Economic Community is expecting 9 percent. The current exchange rate is 90.772 Kenyan Shillings (KS) per euro (EUR). Dolan assumes that relative purchasing power parity applies. If Dolan wants to compute an exchange rate at the end of the year so that he can use it for purposes of portfolio valuation, the closest exchange rate (KS/EUR) would be:

A) 97.4342 KS/EUR.
B) 84.5654 KS/EUR.
C) 106.2032 KS/EUR.
D) 98.9415 KS/EUR.

3) Chao Wong, CFA, is the portfolio manager for the China Current Fund in Switzerland. Wong wants to relate inflation rate differentials to exchange rate movements. The appropriate method that he should use is:

A) uncovered interest rate parity.
B) covered interest rate parity.
C) relative purchasing power parity (PPP).
D) international Fisher relation.

#### Solution Preview

1) Doug Wyatt is a currency trader for Global Currency Exchange Inc. Wyatt has compiled the following information concerning the U.S. dollar (\$) / Australian dollar (AUD) exchange rate.
? Spot bid rate: \$0.745
? 3-month forward bid rate: \$0.752
? 3-month forward ask rate: \$0.754
Which of the following statements concerning the currencies is CORRECT?

A) The AUD is selling at a forward discount of 4.83%.
B) The AUD is selling at a forward premium of 3.21%.
C) The USD is selling at a forward premium of 2.82%.
D) The AUD is selling at a forward premium of 4.83%

Answer: B) The AUD is selling at a ...

#### Solution Summary

3 multiple choice questions on Forward premium/discount, Exchange rate movements, Parity have been answered.

\$2.19