The U.S. inflation rate is expected to be 3 percent over the next three years, while the European inflation rate is expected to be 4 percent over the same period. The current spot rate of the euro is $1.03. Using purchasing power parity, the expected spot rate at the end of 3 years is ____.

$1.0603

$1.0403

$1.0197

$1.0005


ABC Corporation would like to forecast the value of the euro three years from now using forward rates.It observes that the three-year interest rates in the U.S. and Europe are 2% and 5% respectively. Based on this information, the euro should ____ by ____% over the next three years.

depreciate; 2.86%

appreciate; 2.94%

depreciate; 8.33%

appreciate; 9.09%


Assume that interest rate parity holds. The U.S. three-year interest rate is 5% annualized, and the Mexican three-year interest rate is 8% annualized. Today's spot rate of the Mexican peso is $0.20. What is the approximate three-year forecast of the peso's spot rate if the three-year forward rate is used as a forecast?

$0.1838

$0.2175

$0.2060

$0.1940


Assume that interest rate parity holds. The U.S. five-year interest rate is 8% annualized, and the Mexican five-year interest rate is 2% annualized. Today's spot rate of the U.S. dollar is equal to 9 Mexican pesos. What is the approximate five-year forecast of the spot rate of U.S. dollar in terms of Pesos if the five-year forward rate is used as a forecast?

6.7627

11.9773

9.5402

8.2831


Assume that interest rate parity holds. The U.S. five-year interest rate is 2% annualized, and the Mexican five-year interest rate is 8% annualized. Today's spot rate of the U.S. dollar is equal to 9 Mexican pesos. What is the approximate five-year forecast of the spot rate of U.S. dollar in terms of Pesos if the five-year forward rate is used as a forecast?

11.9773

6.7627

9.5402

8.2831


The expected inflation rates in the U.S. and Germany are 3% and 6% respectively. What can be said about the movement of $ in the near future based on international parity relationship?

$ should depreciate by 2.83%

$ should depreciate by 2.91%

$ should appreciate by 2.83%

$ should appreciate by 2.91%


The expected inflation rates in the U.S. and Germany are 6% and 3% respectively. What can be said about the movement of $ in the near future based on international parity relationship?

$ should appreciate by 2.91%

$ should appreciate by 2.83%

$ should depreciate by 2.83%

$ should depreciate by 2.91%

The inflation rate in the U.S. is 3%, while the inflation rate in Japan is 10%. The current exchange rate for the Japanese yen (¥) is $0.0075. After supply and demand for the Japanese yen has adjusted in the manner suggested by purchasing power parity, the new exchange rate for the yen will be:

$0.0076

$0.0073

$0.0066

$0.0070


The U.S. inflation rate is expected to be 4 percent over the next year, while the European inflation rate is expected to be 3 percent. The current spot rate of the euro is $1.03. Using purchasing power parity, the expected spot rate of euro at the end of one year is _______.

$1.06

$1.02

$1.04

$1.01

5 points


A U.S. based firm is planning to set up a project in France with an expected life of 5 years. The project is expected to generate a cash flows of euros 2 million, 2.5 million, 3 million, 3.25 million and 3.5 million over the next five years. The project requires an initial investment of $8 million. The current spot rate of euro is $1.25 which is expected to appreciate by 1.5% per year over the next 5 years.

What is the IRR of this project?

20.58%

28.51%

18.77%

32.43%


Petrus Company has a unique opportunity to invest in a two-year project in Australia. The project is expected to generate 1,000,000 Australian dollars (A$) in the first year and 2,000,000 Australian dollars in the second. Petrus would have to invest A$1,500,000 in the project. Petrus has determined that the cost of capital for similar projects is 14%. What is the internal rate of return of this project if the spot rate of the Australian dollar for the two years is forecasted to be $0.55 and $0.60, respectively? Assume the current spot rate to be $0.50.

7.76%

53.52%

9.64%

68.36%


Given a home country and a foreign country, purchasing power parity (PPP) suggests that

home currency will appreciate if home inflation rate is lower than foreign inflation rate.

home currency will appreciate if home interest rate is lower than foreign inflation rate.

home currency will depreciate if home interest rate is lower than foreign inflation rate.

home currency will depreciate if home inflation rate is lower than foreign inflation rate.

Given a home country and a foreign country, purchasing power parity (PPP) suggests that

home currency will appreciate if the home inflation rate exceeds the foreign inflation rate.

home currency will depreciate if the home inflation rate exceeds the foreign inflation rate.

home currency will appreciate if the home interest rate exceeds the foreign inflation rate.

home currency will depreciate if the home interest rate exceeds the foreign inflation rate.


According to the international Fisher effect, if U.K. has a much higher nominal interest rate than other countries, its inflation rate will likely be ____ than other countries, and its currency will ____.

higher; weaken

lower; strengthen

lower; weaken

higher; strengthen


The theory of purchasing power parity states that, between two nations, the :

interest rates are higher for stronger currencies

currency of country with higher inflation would appreciate relative to currency of country with lower inflation

the inflation rates in two countries are unrelated

appreciation or depreciation in exchange rate would be approximately equal to difference in inflation between two countries


Petrus Company has a unique opportunity to invest in a two-year project in Australia. The project is expected to generate 1,000,000 Australian dollars (A$) in the first year and 2,000,000 Australian dollars in the second. Petrus would have to invest A$1,500,000 in the project. Petrus has determined that the cost of capital for similar projects is 14%. What is the net present value of this project if the spot rate of the Australian dollar for the two years is forecasted to be $0.55 and $0.60, respectively? Assume the current spot rate to be $0.50.

$916,128

$655,817

-$94,183

-24,122


Apple Inc is planning to set up a project in Japan with an expected life of 5 years. The project is expected to generate a cash flows of Yen 2 million, 2.5 million, 3 million, 3.25 million and 3.5 million over the next five years. The project requires an initial investment of Yen 8 million. The current spot rate of $ and Yen is $1=Yen 105. $ is expected to depreciate by 1.25% per year over the next 5 years against Yen.

What is the NPV of this project in $ terms at a cost of capital of 8%?

$25,959

$34,239

$21.72 million

$285 million