Professional Documents
Culture Documents
2.11.2017
FIN 435
UIN: 00981224
CRN: 27697
Chapter 6 Homework (#2a, 7, 12, and 16)
2a. Argentine Tears. The Argentine peso was fixed through a currency board at
Ps1.0/$ throughout the 1990s. In January 2002, the Argentine peso was floated. On
January 29, 2003, it was trading at Ps3.20/$. During that one-year period,
Argentinas inflation rate was 20% on an annualized basis. Inflation in the United
States during that same period was 2.2% annualized.
a. What should have been the exchange rate in January 2003 if PPP held?
12. Casper LandstenCIA (A). Casper Landsten is a foreign exchange trader for
a bank in New York. He has $1 million (or its Swiss franc equivalent) for a short-
term money market investment and wonders whether he should invest in U.S.
dollars for three months or make a CIA investment in the Swiss franc. He faces the
following quotes:
16. Separated by the Atlantic. Separated by more than 3,000 nautical miles and
fie time zones, money and foreign exchange markets I both London and New York
are very efficient. The following information has been collected from the respective
areas.
Assumptions London New
York
Spot exchange rate ($/) 1.3264 1.3264
1-year Treasury bill rate 3.900% 4.500%
Expected inflation rate Unknown 1.250%
a. What do the financial markets suggest for inflation in Europe next year?
100 + 3.900% = 103.9% ; 100+ 4.5% = 104.5% ; 100 + 1.250% = 101.250%
(104.5% / 101.250%) * 100 = 103.210%
103.210 100 = 3.210%
The expected rate of inflation in Europe is: ((103.900/103.210) -1) * 100 = .669%
b. Estimate todays 1-year forward exchange rate between the dollar and the
euro?
Courtney Gilliam
2.11.2017
FIN 435
UIN: 00981224
CRN: 27697
Spot exchange rate ($/) 1.3264
US dollar one-year Treasury bill rate 4.500%
European euro one-year Treasury bill 3.900%
rate
One year forward rate ($/) 1.3264 * (1+4.500%) / (1 + 3.900%) =
1.3341