 # World Currencies

## Question

1. Using exchange rates: take a look back at the figure to answer the following questions:
a. if you have \$100 how many euros can you get?
b. how much is one euro worth?
c. if you have 5 million euros, how many dollars do you have?
d. which is worth more, a New Zealand dollar or a Singapore dollar?
e. which is worth more, a Mexican peso or a Chilean peso?
f. how many Mexican pesos can you get for a euro? What do you call this rate?

2. using the cross-rate use the information in figure 21.1 to answer the following questions
a. which would you rather have \$100 or £100? Why?
b. which would you rather have 100 Swiss francs (SF) or L00? Why?
c. what is the cross-rate for Swiss francs in terms of British pounds? For British pounds in terms of Swiss francs?

3. forward exchange rates: use the information in figure 21.1 to answer the following questions:
a. what is the six-month forward rate for the Japanese yen in yen per US dollar? Is the yen selling at a premium or a discount? Explain.
b. what is the three-month forward rate for Canadian dollars in US dollars per Canadian dollar? Is the dollar selling at a premium or a discount? Explain.
c. what do you think will happen to the value of the dollar relative to the yen and the Canadian dollar, based on the information in the figure? Explain.

4. Using spot and forward exchange rates: suppose the spot exchange rate for the Canadian
dollar is Can \$1.06 and the six-month forward rate is Can \$1.11.
a. which is worth more, a US dollar or a Canadian dollar?
b. assuming absolute PPP holds, what is the cost in the US of an Elkhead beer if the price in Canada is Can \$2.50? Why might the beer actually sell at a different price in the US?
c. is the US dollar selling at a premium or a discount relative to the Canadian dollar?
d. which currency is expected to appreciate in value?
e. which country do you think has higher interest rates – the US or Canada? Explain?

5. Cross- rates and arbitrage: suppose the Japanese yen exchange rate is Y112 = \$1 and the British pound exchange rate is L1 = \$1.93.
a. which is the cross-rate in terms of yen per pound?
b. suppose the cross-rate is Y209 = L1. Is there an arbitrage opportunity here? If there is, explain how to take advantage of the mispricing. ## Solution Preview

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1.
a. if you have \$100 how many euros can you get?
The Euro is 1.5363 in \$’s or .6509 per \$1., so \$65.09.
b. how much is one euro worth? \$1.5363
c. if you have 5 million euros, how many dollars do you have? 5million(1.5363) = \$7,681,500.00
d. which is worth more, a New Zealand dollar or a Singapore dollar?
The New Zealand dollar is .7494 in \$’s or 1.3344 per \$1.
The Singapore dollar is   .7245 in \$’s or 1.3803   per \$1.
So New Zealand dollar.
e. which is worth more, a Mexican peso or a Chilean peso?
The Mexican peso is   .0965 in \$’s or 10.3584 per \$1.
The Chilean peso is .002009 in \$’s or 497.76   per \$1.
So Mexican peso.
f. how many Mexican pesos can you get for a euro? What do you call this rate?
The Mexican peso is .0965 in \$’s or 10.3584 per \$1. The Euro is 1.5363 in \$’s or .6509 per \$1.
The peso/euro cross rate is found by (peso/\$)(\$/Euro) = 10.3584(1.5363) = 15.9136 pesos per euro
g. per unit, what is the most valuable currency of those listed? The least valuable?
Most valuable: Kuwait dinar = \$3.7595
Least valuable: Vietnam dong = \$0.00006020...
\$29.25 for this solution

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