1. USD price of Big Mac in South Africa and the US are $4.50 and $3.90 respectively. The price of Big Mac in South African Rand is also 37.05. PPP implied exchange rate of South African Rand is 9.50 SAR per dollar. What is the extent of SAR undervaluation or overvaluation (Calculate it in percentages) Hint: You need to find the exchange rate between SAR and USD first from the information given, then find the percent under/over valuation.
13.36% Undervaluation
15.38% Overvaluation
20% Overvaluation
10% Undervaluation
2. Annual inflation rates and exchanges rates in the US and Brazil were as follows
Date USD/BRL PI_BRL PI_US
2009 2.6800 112 103
2010 1.8500 122 106
2011 1.5700 129 108
What would be the real exchange rate of BRL in 2011 if we used 2009 as base year.
1.5334
1.2345
1.9545
1.8752
3. 3 Chase Econometrics has just published projected inflation rates for the United States and Euro-zone for the next five years. U.S. inflation is expected to be 2% per year, and Euro-zone inflation is expected to be 3.5% per year. If the current exchange rate is 1.4500 $ per €, what should the expected PPP implied €/$ exchange rates be five years from now?
1.3479
1.5597
1.4289
1.4713
4. Suppose that on January 1st the annual cost of borrowing in JPY and US dollars are 2% and 7% respectively (Rjpy=2% and RUS=7%). The spot rate of USD on January 1st is USD/JPY110 or 110 ¥ per $. One year forward rate was quoted as USD/JPY102 or 102. What is the USD cost of borrowing in JPY? Or what is the rate of borrowing in USD?
-5.4%
2%
10%
7%
5. According to the international Fisher effect, if U.S. investors expect a 5% rate of domestic inflation over one year, and a 2% rate of inflation in Japan, and require a 3% real return on investments over one year, the nominal interest rate on one-year U.S. Treasury securities would be:
2%
3%
-2%
5.06%
8.15%
6. According to the Big Mac Index, the implied PPP exchange rate is Mexican peso 8.50/$1 but the actual exchange rate is peso10.80/$1. Thus, at current exchange rates the peso appears to be ________ by ________.
overvalued; approximately 21%
overvalued; approximately 27%
undervalued; approximately 21%
undervalued; approximately 27%
7. Suppose on that on January 1st a Mexican firm borrows $20 million from Citibank (USA) for one year at 8.00% interest per annum. The loan was taken when the spot rate was USD/MXP3.40. At the end of the one year when the loan was repaid, the exchange rate was USD/MXP 5.80. Based on the above information, calculate the Mexican Peso cost of the dollar loan in percentages.
8.00 %
20%
45.72%
84.24%
18.45%
8. Sony of Japan produces PSP hand held players and exports them to the United States. Last year the exchange rate was JPY75/$ and Sony charged $199 per PSP player. Currently the spot exchange rate is 85/$ and Sony is charging $179 per PSP player. What is the degree of pass through by Sony of Japan on their PSP players?
87.9%
85.43%
73.2%
4.1%
9. Assume a nominal interest rate on one-year U.S. Treasury Bills of 4.60% and a real rate of interest of 2.50%. Using the Fisher Effect Equation, what is the expected rate of inflation in the U.S. over the next year?
1.905%
2.068%
2.048%
2.00%
10. Suppose that the current spot exchange rate is 6.25 Swedish Krona per $ and the three-month forward exchange rate is 6.28 SEK per $. The three-month interest rate is 5.6% per annum in the U.S. and 8.8% per annum in Sweden. Assume that you can borrow up USto $1,000,000 or SEK 6,250,000. Can you generate arbitrage profits? Show your profits both in USD and SEK terms. (19580/6.28=3117.8)
$ 4,250
SEK 4,250
$ 3,118
SEK 3,118