Question

1. If inflation in U.S. is projected at 3% annually for the next year and at 8% annually in Mexico for the same period, and the spot rate is currently at 10.20 pesos/$, then the purchasing power parity implies that the spot rate one year from now is (rounded):

a.Pesos 10.4512/$

b.Pesos 10.695/$

c.Pesos 9.9548/$

d.Pesos 9.7278/$  

2.

Special Drawing Rights (SDRs) are

	a.	special rights of New Yorkers to paint graffiti on New York subways
	b.	rights of World Bank members to get loans from The New York Federal Reserve Bank
	c.	criteria that IMF members have to follow before they can become IMF members
	d.	voting rights of each country in the IMF
	e.	none of the other four

3.

I am a US wine exporter who is exporting wine to Portugal worth € 100,000 and the amount is due in one year. I want to hedge my euro receivables using a money market hedge and obtain the following quotes from my banker.

Bid Ask Spot rate is $1.3000 – $ 1.3100 per €.

The Portugese interest rates are 4 % - 4.6 % annually and the US interest rates are 3.1 – 3.6 % annually.

Using a money market hedge and bid-ask spreads, what are my receivables in dollars in one year (rounded)?

	a.	$129,599
	b.	$129,124
	c.	$128,136
	d.	$124,283

Answer 1

Q1. Expected future spot rate = exchange rate * (1+foriegn interest rate)/(1+domestic interest rate)

According to fisher equation, (1+interest rate)= (1+real interest rate)*(1+inflation rate)

Assuming same real interst rate to be same,

Expected future spot rate = 10.20*(1+0.03)/(1+0.08) = 9.7278 peso/$