Assume a nominal interest rate on one-year U.S. Treasury Bills
QUESTION 341. Assume a nominal interest rate on one-year U.S. Treasury Bills of 2.60% and a real rate of interest of 1.00%. Using the Fisher Effect Equation, what is the approximate expected rate of inflation in the U.S. over the next year?1.00%1.60%2.10%2.05%2 pointsQUESTION 351. Assume the current U.S. dollar-British spot rate is 0.6993£/$. If the current nominal one-year interest rate in the U.S. is 5% and the comparable rate in Britain is 6%, what is the approximate forward exchange rate for 360 days?a.£0.7060/$b.£0.6993/$c.£1.42/$d.£1.43/$2 pointsQUESTION 361. A major U.S. multinational firm has forecast the euro/dollar rate to be €1.10/$ one year hence, and an exchange rate of $1.40 for the British pound (£) in the same time period. What does this imply the company’s expected rate for the euro per pound to be in one year?a.€1.54/£b.£1.40/€c.£1.54/€d.€1.40/£2 pointsQUESTION 371. Jaguar has full manufacturing costs of their S-type sedan of £22,803. They sell the S-type in the UK with a 20% margin for a price of £27,363. Today these cars are available in the US for $55,000 which is the UK price multiplied by the current exchange rate of $2.01/£. Jaguar has committed to keeping the US price at $55,000 for the next six months. If the UK pound appreciates against the USD to an exchange rate of $2.15/£, and Jaguar has not hedged against currency changes, what is the amount the company will receive in pounds at the new exchange rate?a.£27,363b.£22,803c.£55,000d.£25,5812 pointsQUESTION 381. With covered interest arbitrage:a.the market must be out of equilibrium.b.the arbitrageur trades in both the spot and future currency exchange markets.c.a “riskless” arbitrage opportunity exists.d.all of the above2 pointsQUESTION 391. Argentina’s economic performance in the 1990s while their peso was pegged to the U.S. dollar can be characterized as ________ rates of inflation and ________ rates of unemployment.a.low; high;b.low; lowc.high; lowd.high; high2 pointsQUESTION 401. Peter Simpson thinks that the U.K. pound will cost $1.48/£ in six months. A 6-month currency futures contract is available today at a rate of $1.44/£. If Peter was to speculate in the currency futures market, and his expectations are correct, which of the following strategies would earn him a profit?a.Buy a pound currency futures contract.b.Sell a pound currency futures contract.c.Sell pounds today.d.Sell pounds in six months.
