Question #9
Reading: Reading 5 Currency Exchange Rates - Understanding Equilibrium Value
PDF File: Reading 5 Currency Exchange Rates - Understanding Equilibrium Value.pdf
Page: 4
Status: Unattempted
Question
Given spot exchange rate of CAD/EUR 1.425-1.435, The spread is closest to:
Answer Choices:
A. 10 pips EUR
B. CAD 0.010
C. CAD 0.0010 Jennifer Nance has recently been hired as an analyst at the Central City Bank in the currency trading department. Nance, who recently graduated with a degree in economics, will be working with other analysts to determine if there are profit opportunities in the foreign exchange market. Nance has the following data available: U.S. Dollar ($) U.K. Pound (£) Euro(€) Expected inflation rate 6.0% 3.0% 7.0% One-year nominal interest rate 10.0% 6.0% 9.0% Market Spot Rates U.S. Dollar ($) U.K. Pound (£) Euro(€) U.S. Dollar ($) $1.0000 $1.6000 $0.8000 U.K. Pound (£) 0.6250 1.0000 2.0000 Euro (€) 1.2500 0.5000 1.0000 Market 1-year Forward Rates U.S. Dollar ($) U.K. Pound (£) Euro(€) U.S. Dollar ($) $1.0000 $1.6400 $0.8082
Explanation
Spread = CAD 1.4350 − 1.4250 = CAD 0.010
(Module 5.1, LOS 5.a)
Jennifer Nance has recently been hired as an analyst at the Central City Bank in the currency
trading department. Nance, who recently graduated with a degree in economics, will be
working with other analysts to determine if there are profit opportunities in the foreign
exchange market.
Nance has the following data available:
U.S. Dollar ($)
U.K. Pound (£)
Euro(€)
Expected inflation rate
6.0%
3.0%
7.0%
One-year nominal interest
rate
10.0%
6.0%
9.0%
Market Spot Rates
U.S. Dollar ($)
U.K. Pound (£)
Euro(€)
U.S. Dollar ($)
$1.0000
$1.6000
$0.8000
U.K. Pound (£)
0.6250
1.0000
2.0000
Euro (€)
1.2500
0.5000
1.0000
Market 1-year Forward Rates
U.S. Dollar ($)
U.K. Pound (£)
Euro(€)
U.S. Dollar ($)
$1.0000
$1.6400
$0.8082
U.K. Pound (£)
0.6098
1.0000
2.0292
Euro (€)
1.2373
0.4928
1.0000
Nance receives a report from Jamshed Banaji, Chief Economist at Central City Bank providing
broad U.K. and U.S. macro-economic forecasts. Nance notes that the Bank of England is
expected to pursue an expansionary monetary policy while the Federal Reserve monetary
policy is expected to be neutral. Also, the British parliament is expected to reduce the
budget deficits more aggressively as compared to the U.S.