Multiple Part:

(The following information applies to the next three problems.)

You observe the following exchange rates and interest rates:

 In the spot market, 1 EMU euro equals 0.88 U.S. dollar.

 In the spot market, 1 Canadian dollar equals 0.70 EMU euro.
 In the three-month forward market, 1 EMU euro equals 0.75 U.S. dollar.
 In the three-month forward market, 1 EMU euro equals 1.21 Canadian dollars.
 Three-month risk-free Canadian securities have a 6 percent nominal annual
interest rate.
Assume that interest rate parity holds, the market is in equilibrium, and that
there are no arbitrage opportunities.

Cross rates Answer: a Diff: E N

49. What is the spot exchange rate between the U.S. dollar and the Canadian
dollar?

a. $0.62 U.S. = $1 Canadian

b. $0.76 U.S. = $1 Canadian
c. $0.80 U.S. = $1 Canadian
d. $1.25 U.S. = $1 Canadian
e. $1.32 U.S. = $1 Canadian

Purchasing power parity Answer: d Diff: E N

50. A new tennis racket costs $120 in the United States. Assuming that
purchasing power parity holds, how much should the exact same tennis racket
cost if bought in Europe with EMU euros?

a. 84.00 EMU euros

b. 105.60 EMU euros
c. 113.62 EMU euros
d. 136.36 EMU euros
e. 171.43 EMU euros

Forward exchange rates Answer: a Diff: M N

51. Which of the following statements is most correct?

a. The market is forecasting that the U.S. dollar will weaken against the
Canadian dollar over the next three months.
b. The market is forecasting that the U.S. dollar will weaken against the
EMU euro over the next three months.
c. The market is forecasting that the EMU euro will strengthen against the
Canadian dollar over the next three months.
d. Statements a and c are correct.
e. All of the statements above are correct.

Chapter 19 - Page 15