Problem CYou are given the following information.

Today’s Spot rate for Euro against USD : € 1.50 / $The estimated three months forward : € 1.51 / $

Germany currently witnesses inflation of 4%. If PPP holds good, find out the inflation in the US.

(Important Note: The following problems are for explanation of the principles and may not necessarily reflect the current spot/forward rates of various currencies. Some currencies could possibly be out of currency too – pun intended)___________________________________________________________________________________

CLASS WORK OUT PROBLES IN PPP (IRP follows in the next pages)Problem AThe exchange rate in spot markets for Yen 102/$. Japan’s inflation is 3% and US runs at 4%. Find out the forecasted forex rates after six months between USD and Yen.

CLASS WORK OUT PROBLES IN IRP

Problem A

Spot rate for ¥ vs. $ is 102The interest rates for 3 months and 6

months are ¥ - 2.0%, $ - 5.0% and ¥ - 3.0%, $ - 6.0% respectively. Find out the forward rates for three months and for six months.

Problem B

A customer obtains the following quotes :

Spot Rs / $ : 45.00 / 45.106 month $ interest rates : 5% - 5.5 %6 month Re interest rates : 10% - 11%

Problem BThe current spot rate for cable is $ 1.65. Theprojected inflation rates in USA and England for 3 years are given in the following table :-

Year Inflation in Inflation in theEngland ( % ) US( % )

1 4.0 3.02 5.0 4.53 5.5 7.0

Find out the forecasted cable at the end of

Problem DFind out Dutch Kroner Vs. Euro in spot markets in the following case :-

Spot markets : USD 1.35 per Three months forward : DK 1.50 per USDInflation in the US is 3% and in Denmark is

Problem F

A dealer forecasts USD at 125 yen in one year. Today’s spot is JPY 111 / USD. Inflation today in the US is 4%, what is the implicit inflation rate in Japan if PPP holds.

Problem HThe spot is Rs. 46.00/USD. Inflation - India 8% and USA 3%. Evaluate the estimated depreciation of the Rupee. Also find out the estimated appreciation of the dollar.

Problem IIndian inflation is hovering around is 7% whereas Switzerland has 2% and expected to remain so for the next three years. The spot is Rs. 24.00 today. If CHF has appreciated in real terms at 5% against Rupee in one year, what are the implicit exchange rates estimated for each of the next three years..

Problem C

A customer gets the following quotes from his banker :Spot Rs / US$ : 45.10/45.30Forward rates for 3 months : Rs / US$ : 45.50/45.80Indian Interest rates for 3 months : 12% - 15%

Find out the range of American interest rates (interest rate band) which will prevent interest rate arbitrage.(Hint : Arbitrage is ruled when repayment exceeds investment returns)

What do you think will be the likely six month forward quote ?

Problem D

In April 1997, the following rates were being quoted.

Rs / $ Spot : 35.68 / 36.03Three month forward : 0.40 / 0.60Three month interest rates : $-6.0 %, Re-12.0%

Test for interest parity.

Problem EYou are given the following interest rates.

Re $3 month 15% 6%6 month 14.5%

5.5%9 month 14.0%

5.0%The 3 month forward rate is Rs. 36/$.

Calculate the 3 month forward rate 6 months Problem FYou are given the following exchange rates (when DM existed)

Spot ( Yen / $) : 1223 month interest rates : DM - 4%; Yen - 3%3 month forward rate : Yen 80 / DMGerman inflation rate : 3%US inflation rate : 5%

Calculate the 3 month DM / $ rate.

Problem GYou have seen the following newspaper quotes.

Rs/$ Spot : 36.00 / 36.503 months : Re interest rate - 14%

$ interest rate - 6%

The spread is likely to increase at the rate of 10 points per month. Estimate the three month expected spot rate

(Hint : Use Mid Rate to solve this problem)