1. What does it mean to obtain the cross rate for two currencies? Why would one want to obtain the cross rate for two currencies? The current spot rate on the British pound sterling is 1.8835($/£) and the current spot rate on the Euro is 1.5121 (Euro/$). Determine the cross rate for the Euro and the pound sterling. Suppose the spot rate for the pound sterling against the Euro is actually 2.837 (Euro/£). Describe the arbitrage opportunity that results.

2. Iowa Grain Syndicate exports large quantities of corn and wheat to Russia and Eastern Europe. The Syndicate was quoted a borrowing an annual rate of 9% in Chicago, but borrowed €3,000,000 for one year at 6% interest in Frankfurt in order to save on interest costs. During the year the euro appreciated 8% from its initial rate of $1.200/€. Was it wise for the Syndicate to borrow in Frankfurt instead of Chicago? What was its cost?

3. Assume that the Singapore dollar (SGD)'s spot rate is $0.57 and that the Singapore and U.S. inflation rates are similar. Then assume that the Singapore experiences some inflation, while the U.S. experiences a 6% inflation. According to purchasing power parity, the new value of the Singapore dollar (SGD) after it adjusts to the inflationary changes is 0.58995.What is the rate of inflation that Singapore experiences?

4. Smart Banking Corp. can borrow $5 million at 6% annualized. It can use the proceeds to invest in Canadian dollars at 9% annualized over a six-day period. The Canadian dollar is worth $0.95 today and is expected to worth $0.94 in six days. Based on this information, should Smart Banking Corp. borrow U.S. dollars and invest in Canadian dollars? What would be the gain or loss in U.S. dollars?

5. Based on the following assumption: Spot rate of € = $1.20; 180-day forward rate of € = $1.21; 180-day Euro interest rate = 3.5%; the current 90-day U.S. interest rate = 2.5 % and the future 90-day U.S. interest rate will be same as the current 90-day rate. Is covered interest arbitrage by U.S. investors feasible? Explain with an example. (Note that you need to compute the 180-day rate for the U.S. security.)