Part 11 Marks 60 Which of the following condition? A: Spot and forward exchange
ID: 2807733 • Letter: P
Question
Part 11 Marks 60 Which of the following condition? A: Spot and forward exchange rates tend to 1. statements is correct regarding the covered interest parity with the interest differential. Th diverge, in general, to be precisely in line e domestic interest rate must be higher or lower than the foreign interest rate by the extent the domestic currency is anticipated to Th depreciate or appreciate. e domestic interest rate must be lower (higher) than the foreign interest rate A and C are correct. at has an annual interest rate of 5% rather than a comparable British bond that has by the extent the domestic currency sells at a discount (premium). All of the above statements are correct D: E: According to the international Fi bond th an annual interest rate of 6%, then the investor must be expecting the 2. sher Effect, if an investor purchases a five-year U.S. at a rate of at least 1% per year over the next 5 years. A: British pound; appreciate B: British pound; revalue C: U.S. dollar; appreciate D: U.S. dollar; depreciate 1 Cecisti ne ollaprealu A: the domestic interest rate is higher than the foreign interest rate. 3. A decision to hedge receivables in the money market will be taken if: B: C: D: the domestic interest rate is lower than the foreign interest rate. the interest parity forward rate is higher than the expected spot rate. the interest parity forward rate is lower than the expected spot rate. E: the interest parity forward rate is equal to the expected spot rate. 4. At the beginning of 2002 the AUD/USD exchange rate was 1.9585 and the 2002 inflation rates were 3.30% for Australia and 2.33% for the US. What should the AUD/USD exchange rate have been at the end of2002, according to the approximate calculation of Relative PPP theory? A USD/AUD 0.5068 B: AUD/USD 1.9736 C: AUD/USD 1.9775 D: USD/AUD 1.8769 E: USD/AUD 0.8467Explanation / Answer
1. The definition of covered interest parity states that interest rate differential between two currencies in the cash money markets should match the differential between the forward and spot exchange rates.
Considering these, option A and C should be true.
2. C. US dollar, appreciate
3. Receivables are hedged, when the expected spot rate is anticipated to decline in coming months compared to current spot rate. Hence, option C should hold true.
4. The PPP formula is expressed as
S1/S0= 1+ih/1+if
Where S0 is the spot exchange rate at the begining of period
Where S1 is the spot exchange rate at the end of period
ih is interest rate for home currency
if is interest rate for foreign currency
Since AUD/USD= 1.9585, AUD is the domestic currency here
Therefore,
S1/1.9585= 1+0.033/1+0.0233
Or, S1= 1.9585 x 1.009479
= 1.97706
Option C is correct.