1. Assume the spot market exchange rate for $1 is currently A$1.1904. The expected inflation rate is 3.3 percent in Australia compared to the U.S. rate of 2.8 percent. What is the expected exchange rate one year from now if relative purchasing power parity exists?
A$1.1844
A$1.2062
A$1.1964
A$1.2286
2. Assume a risk-free asset in the U.S. is currently yielding 2.7 percent while a Canadian risk-free asset is yielding 2.8 percent and the current spot rate is Can$.8829 = $1. What is the approximate 6-month forward rate if interest rate parity holds?
Can$.8833
Can$.8825
Can$.8839
Can$.8843