1. 4.21 The current fiveyear Euro yen rate is 6% per annum (compounded annually)

Question

1.

4.21 The current fiveyear Euro yen rate is 6% per annum (compounded annually). The fiveyear Eurodollar rate is 8.5%. What is the implied forward premium or discount of the yen (over the current spot rate) for a fiveyear forward contract?

a) 4.17% premium

b) 18.46% discount

c) 11.00% discount

d) 12.36% premium

Ans:     d

4.31 Suppose the pound devalues from $1.25 at the start of the year to $1.00 at the end of the year. Inflation during the year is 15% in England and 5% in the U.S. What is the real devaluation () or real revaluation (+) of the pound during the year?

a) 12.38%

b) 20.71%

c) + 2.39%

d) + 1.46%

Ans:     a

PLEASE PROVIDE CLEAR STEP-BY-STEP ANSWER ON HOW TO GET THIS FIGURE

Explanation / Answer

4.21 The current fiveyear Euro yen rate is 6% per annum (compounded annually). The fiveyear Eurodollar rate is 8.5%. What is the implied forward premium or discount of the yen (over the current spot rate) for a fiveyear forward contract?

Implied Forward Premium=((1+Euroyen)^5/(1+ Eurodollar)^5)-1

Implied Forward Premium =((1+.085)^5/(1+.06)^5)-1

Implied Forward Premium =12.36%

4.31 Suppose the pound devalues from $1.25 at the start of the year to $1.00 at the end of the year. Inflation during the year is 15% in England and 5% in the U.S. What is the real devaluation () or real revaluation (+) of the pound during the year?

Pound forward rate=Spot*(1+r domestic)/(1+r foreign)

Pound forward rate=1.25*(1+.05)/(1+0.15)= $1.141

However Pound actual rate =$1

Thus real devaluation=( Actual rate- forward rate)/forward rate

real devaluation=(1-1.414)/1.141 =-12.38%

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