1. Please use the exchange rate quotes provided in the table to answer following questions.

(a) Based on the 1/1/2012 quote, convert CD8,000,000 into USD.

(b) Based on the 1/1/2012 quote, convert USD25,000,000 into Swiss Francs.

(c) During the one year period, what was the percentage appreciation or depreciation of the Japanese Yen from the US viewpoint?

(d) During the one year period, what was the percentage appreciation or depreciation of the USD from the Swiss viewpoint?

2. Assume that the Japanese yen is trading at a spot price of 92.04 cents per 100 yen. Further assume that the premium of an
American call (put) option with a strike price of 93 is 2.10 (2.20) cents. Calculate the intrinsic value and the time value of the call and put options.

3. Currently, the spot exchange rate is USD1.50/GBP and the three month forward exchange rate is USD1.52/GBP. The three month interest rate is 8% per annum in the U.S. and 5.8% per annum in the U.K. Assume that you can borrow as much as USD1,500,000 or GBP1,000,000.

(a) Determine whether the interest parity is currently holding.

(b) If the IRP is not holding, how would you carry out covered interest arbitrage? Show all steps and determine the arbitrage profit.

(c) Explain how the IRP will be restored as a result of covered arbitrage activities.

4. Does foreign currency exchange hedging both reduce risk and increase expected value? Explain, and list several arguments in favour of currency risk management and several against.

5. ADRs are a popular investment tool for many U.S. investors. In recent years several alternatives for investing in foreign equity securities have become available for U.S. investors, yet ADRs remain popular. Define what an ADR is and provide at least three examples of the advantages they may hold over alternative foreign investment vehicles for U.S. investors.