(Important Note: The following problems are for explanation of the principles and may not necessarily reflect

the current spot/forward rates of various currencies. Some currencies could possibly be out of currency too pun intended)

___________________________________________________________________________________ Problem A The exchange rate in spot markets for Yen 102/$. Japans inflation is 3% and US runs at 4%. Find out the forecasted forex rates after six months between USD and Yen. Problem C You are given the following information. Todays Spot rate for Euro against USD : 1.50 / $ The estimated three months forward : 1.51 / $ Germany currently witnesses inflation of 4%. If PPP holds good, find out the inflation in the US. Problem D Find out Dutch Kroner Vs. Euro in spot markets in the following case :Spot markets : USD 1.35 per Three months forward : DK 1.50 per USD Inflation in the US is 3% and in Denmark is 4% Problem F A dealer forecasts USD at 125 yen in one year. Todays spot is JPY 111 / USD. Inflation today in the US is 4%, what is the implicit inflation rate in Japan if PPP holds. Problem H The spot is Rs. 46.00/USD. Inflation - India 8% and USA 3%. Evaluate the estimated depreciation of the Rupee. Also find out the estimated appreciation of the dollar. Problem I Indian inflation is hovering around is 7% whereas Switzerland has 2% and expected to remain so for the next three years. The spot is Rs. 24.00 today. If CHF has appreciated in real terms at 5% against Rupee in one year, what are the implicit exchange rates estimated for each of the next three years.. Problem B The current spot rate for cable is $ 1.65. The projected inflation rates in USA and England for 3 years are given in the following table :Year 1 2 3 Inflation in Inflation in the England ( % ) US( % ) 4.0 3.0 5.0 4.5 5.5 7.0

CLASS WORK OUT PROBLES IN PPP (IRP follows in the next pages)

Find out the forecasted cable at the end of year 3. Problem E The dollar in Spot is Rs. 45.50. One year forward is Rs. 47.00. Comparative inflation rates are 6% and 3%. Find out the % of real appreciation or real depreciation of the USD. Problem G Swatika Ltd plans a capex of 1,000,000 in Netherlands. The Euro spot is Rs 63. It is envisaged that the project will generate post tax cash flows of 200,000 for 5 years after which the project will be scrapped for 100,000. Find out the viability of the project. You are given the following additional information :Year 1 2 3 4 5 Dutch Inflation(%) 2.40 2.40 2.60 2.80 3.00 India Inflation(%) 9.00 10.50 8.50 9.60 11.00

CLASS WORK OUT PROBLES IN IRP

Problem A Spot rate for vs. $ is 102 The interest rates for 3 months and 6 months are - 2.0%, $ - 5.0% and - 3.0%, $ - 6.0% respectively. Find out the forward rates for three months and for six months. Problem B A customer obtains the following quotes : Spot Rs / $ : 45.00 / 45.10 6 month $ interest rates : 5% - 5.5 % 6 month Re interest rates : 10% - 11% What do you think will be the likely six month forward quote ? Problem C A customer gets the following quotes from his banker : Spot Rs / US$ : 45.10/45.30 Forward rates for 3 months : Rs / US$ : 45.50/45.80 Indian Interest rates for 3 months : 12% - 15% Find out the range of American interest rates (interest rate band) which will prevent interest rate arbitrage. (Hint : Arbitrage is ruled when repayment exceeds investment returns) Problem E You are given the following interest rates. Re 3 month 15% 6 month 14.5% 9 month 14.0% The 3 month forward rate is Rs. 36/$.

Problem D
In April 1997, the following rates were being quoted. Rs / $ Spot : 35.68 / 36.03 Three month forward : 0.40 / 0.60 Three month interest rates : $-6.0 %, Re12.0% Test for interest parity. Problem F You are given the following exchange rates (when DM existed) Spot ( Yen / $) : 122 3 month interest rates : DM - 4%; Yen - 3% 3 month forward rate : Yen 80 / DM German inflation rate : 3% US inflation rate : 5% Calculate the 3 month DM / $ rate.

$ 6% 5.5% 5.0%

Calculate the 3 month forward rate 6 months from now. Problem G You have seen the following newspaper quotes. Rs/$ Spot : 36.00 / 36.50 3 months : Re interest rate - 14% $ interest rate - 6% The spread is likely to increase at the rate of 10 points per month. Estimate the three month expected spot rate

(Hint : Use Mid Rate to solve this problem)