I have the answers in a practice test, but I am really struggling with the HOW to get there?
1. The spot rate between Euro € and US Dollars $ is, in US Dollars $,1€ = $1.35
Suppose that i€=0.05 and that i$=0.05. What is the forward rate?
2. Suppose that
a) The spot rate between US Dollar $ and Euro € is , in US Dollars, 1€ = $1.45
b) The spot rate between US Dollar $ and British Pound £ is, in US Dollars, 1£ = $1.25
What is the spot rate between British Pound £ and €, in Euro?
3. The spot exchange rate between Euro € and British Pound £ is, in Euro €, 1£ = € 0.86
You also know that 1€=$1.33 and that 1£=$1.75
In this market there is an arbitrage opportunity, since the value of the pound relative to the $ is too high to be compatible with 1€=$1.33 and 1£ = € 0.86. Is this statement True or False?
4. Suppose that the spot rate in the market between $ and BP is BP=$2
If the spot rate between $ and Yen is Yen=$1/100, it must be that BP=Yen ______, otherwise there would be an arbitrage opportunity
5. The spot rate between Euro € and US Dollars $ is, in US Dollars $,1€ = $1.35
Suppose that i€=0.2 and that the Forward Rate is 1€ = $1.35. What is i$?