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Week 6 Tutorial Exercises

1)   The current value of the spot exchange rate SAUD_CNY   = 0.2119. If the Chinese inflation rate for the coming year will be 2% while the Australian inflation rate will be 5%, what value of

the exchange rate SAUD_CNY  1 year from now would maintain Relative PPP?

2)    Forward Premium. If FUSD_GBP  = 1.723 and SUSD_GBP  = 1.775 then calculate the forward premium.

3)   Assume that (i) one-year forward exchange rate FUSD_GBP   = 1.723; (ii) the current spot

exchange rate SUSD_GBP  = 1.775; and (iii) the one-year interest rate for GBP is i ∗  = 4.885% . What must one-year USD interest rates be for Covered Interest Parity (CIP) to hold?