Question #10

of 43 Given spot exchange rate of CAD/EUR 1.425-1.435, The spread is closest to: 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 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.