Question

Spot rates and forward rates. On January 1, 2015, one USD can be exchanged for eight foreign currencies (FC). The dollar can be invested short term at a rate of 4%, and the FC can be invested at 5%.

1. Calculate the direct and indirect spot exchange rates for Jan 1, 2015.

2. Calculate the 180-day forward rate to buy FC (assume 365 days per year.)

3. If the spot rate is 1FC = $0.740 and the 90-day forward rate is $0.752, what does this suggest about interest rates in the two countries.

4. Explain why a weak dollar relative to the FC would likely increase US exports.

5. Discuss what would happen to the forward rate if the dollar strengthened relative to the FC.

Answer 1

step!: Iculate the 180-day forward rate to buy FC (assume 2. Calculate 365 days per year) Particulars US Dollars value today | $100 Interest nate 4 % 180 days of interest 1-97260 value in 180 days | $101.97260 Foreign Currency (FC) SOOFC 5% 19.72603 819.72603 FC 180 day forward rate $101.97260 819.72 603 FC IFC = $0.1244 Alternatively, using the formule method. Forward rate :0.125 x 1+0.0197 +0.0246 - 0.12 44 Step 2: 3. Condition. If the spot rote is IFC = $0.740 and the - 90-day forward note is $0.752 Suggestion - Interest rates in the two countries. Explanation :- - The domestic interest rates of united states are higher than that of the foreign country. Assume that the foreign currency is bought in the future. Hence, they are expected to notain and invest dollars until the time arrives. The value of the invested ollars would be more than the value achieved when the foreign currency. was originally acquired and invested at foreign mates. The relation in which the value of the dovar rises over the time in relation to the foreign currency at a higher forward note is present spot rate,

4 Step 3 - Statement : A weak dollar relative to the foreign Currency would likely increase u.s exports. Erlanation The United States dollar is weak relative to a foreign Currency and acquires more dollars equal to the foreign currency. Unlike it takes fewer toreign Currency acquire a u.s. dollar. Accordingly, it takes. fewer foreign amencies to purchase a given amount of us. goods priced in dollars after the u.s. dollar has weakend. This causes u.s. exports to be less expensive and increased exports Step 4 statement - The forward relative to the rate if the dollar strengthend foreign Currency. Explanation- The Currency. The increase in dollar strengthened in relation to the foreign forward rate would decrease when there is the amount of foreign currency. an