Suppose that California rice costs $100 a bushel, and Japanese rice costs 20,000

Question

Suppose that California rice costs $100 a bushel, and Japanese rice costs 20,000 Yen 2. What exchange rate would make the rice equally priced in the local currency; (a) 1S/JY b)0.018/JY; ()0.0050s/JY; (d) 100JY/S; 3. If the rice rose to 40,000 Yen. what nomenal exchange rate would restore the real exchange rate R to the value in the previous question: (a) 0.00258/JY; (b) 50JY/S: (c) 0.01S/JY; (d) 1S/JY 4. The Korean won has fallen nearly 20% over the past year relative to the US$. If the uncovered interest parity theory were correct, what should Korean interest rates have been one year ago if rates in the U.S. were 10%: (a) 10%; (b) 20%; (c) 30%; (d) 0; 5. If the USD/GBP exchange rate was 1.6595, the 60 day forward rate was 1.6545, and the 2-month U.S·Treasury bill rate was 4.58%·What is the 2-month yield of British T-bills if covered interest parity holds: (a) 6.39 (b) 4.55; (c) 3.33; (d) 4.58 6. If the USD/GBP exchange rate was 1.6667, the 90 day forward rate was 1.6938, and the 3-month yield of British T-bills is 3.72%, what is the yield on 3-month U.S. Treasury bills. if covered interest parity holds: (a) 6.39: (b)10.28 (c) 7.33; (d) 6.38; II. Foreign exchange derivatives

Explanation / Answer

2) Price of rice to be same in both the countries, $100=20,000 Yen or

(100/20,000)$=1 Yen or

$0.005=1JY hence the exchange rate= c)$0.005=1JY

3) $100= 20,000 Yen worth of goods initially, now prices have increased in Japan. Hence, $100=40,000 Yen. Prices have doubled in Japan,hence purchasing power of 1 Yen has halved. Hence,to maintain the real exchange rate,nominal exchange rate would become 0.005/2=$0.0025/1JY. Answer is a) 0.0025$/1JY

4) i=i*+ expected rate of depreciation of the home currency as per uncovered interest parity theory. Korean interest rates when US rates were 10% would be c) 30% (; 10%+20%) Here i is the Korean interest rate and i* is the US interest rate.

5) 1+ i=(Ft/St)x(1+i*)

Ft is the forward rate at time t, St is the spot rate at time t. Here, St=1.6595 Ft=1.6545 i=4.58 i*=?

Putting these values in the above equation,we get 1+i*=1.04896 or yield on 2-month British T-bill is approximately d)4.58

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