Question 1: Assume that you can buy 245 Canadian dollars with 100 British pounds. How much profit can you earn on a triangle arbitrage given the following rates if you start out with 100 U.S. dollars?
Country U.S. $ Equivalent Currency per U.S. $
Canada ? 1.3500
U.K. 1.8305 ?
A. $0.86
B. $0.93
C. $1.09
D. $1.37
E. $1.55
Question 2: In the spot market, $1 is currently equal to A$1.42. The expected inflation rate is 3 percent in Australia and 2 percent in the U.S.. What is the expected exchange rate one year from now if relative purchasing power parity exists?
A. A$1.4058
B. A$1.4062
C. A$1.4286
D. A$1.4342
E. A$1.4484
Question 3: You are expecting a payment of C$100,000 four years from now. The risk-free rate of return is 3 percent in the U.S. and 4 percent in Canada. The inflation rate is 3 percent in the U.S. and 2 percent in Canada. The current exchange rate is C$1 = $.72. How much will the payment four years from now be worth in U.S. dollars?
A. $68,887
B. $69,191
C. $69,300
D. $72,222
E. $74,953