Where to get the best exchange rate on US Dollars to Swiss Francs?

Exchange Rate Relationships - Need Answer Today!

• Need answer today (4/13). Questions are very straightforward. 1. Exchange Rates. Use Table 23?1 to answer these questions: a. How many euros can you buy for $100? How many dollars can you buy for 100 euros? b. How many Swiss francs can you buy for $100? How many dollars can you buy for 100 Swiss francs? c. If the euro depreciates with respect to the dollar, will the direct exchange rate quoted in Table 23?1 increase or decrease? What about the indirect exchange rate? d. Is a United States or an Australian dollar worth more? 2. Exchange Rate Relationships. Look at Table 23?1. a. How many Japanese yen do you get for your dollar? b. What is the 1-year forward rate for the yen? c. Is the yen at a forward discount or premium on the dollar? d. Calculate the annual percentage discount or premium on the yen. e. If the interest rate on dollars is 6.5 percent, what do you think is the interest rate on yen? f. According to the expectations theory, what is the expected spot rate for the yen in 1 year?s time? g. According to purchasing power parity, what is the expected difference in the rate of price inflation in the United States and Japan? Table 23-1: Forward Rate Spot Rate 3 Months 1 Year Europe EMU (euro) .9644 .9605 .9503 Sweden (krona) 9.3924 9.4554 9.6239 Switzerland (franc) 1.5231 1.5206 1.5143 U.K. (pound) 1.4994 1.491 1.4658 Americas Canada (dollar) 1.5331 1.5372 1.5502 Mexico (peso) 9.7550 9.91 10.39 Asia/Paci?c/Africa Australia (dollar) 1.7518 1.7657 1.8066 Hong Kong (dollar) 7.8000 7.7993 7.8021 Japan (yen) 123.380 122.81 120.63 Philippines (peso) 50.2450 50.686 52.825 South Africa (rand) 10.2787 10.5532 11.3212

• Answer:

  Source: "Lecture 7: Exchange Rates and Investment Decisions" by Professor Day, University of Texas at Dallas (Fall 1999) http://www.exinfm.com/training/6301l7.rtf Direct quotation is "the dollar price of one unit of foreign currency." Therefore: 1a. $100/$0.9644/euro=103.69 euro. 100 euro*$0.9644/euro=$96.44 1b. $100/$1.5231/sf=65.66 sf. 100 sf*$1.5231/sf=$152.31 1c. decrease (fewer dollars per euro). Increase (indirect quotation is 1/direct quotation). 1d. Australian dollar ($1.75 USD required to purchase one Australian dollar if this is direct. However, given that the Japanese quote is not direct but indirect (at least compared to reality), and this is the opposite of reality, I am concerned there is a lack of consistency of presentation in the table (not all rates are direct)). 2a. I am answering these based on reality, which is that the Japanese quotes are indirect. 123.38 yen/$ 2b. 120.63 yen/$ 2c. Premium. The yen is gaining in value vs. the USD. $1/120.63 yen = $.00829/yen > $1/123.38 yen = $.00811/yen 2d. (1/120.63-1/123.38)/1/123.38*100=2.28% 2e. 1+rUS/1+rJPN=F$/Y/S$/Y Therefore, rJPN = .00829/$.00811(1.065)-1=8.93%. 2f. "...Expectations theory argues that forward rates are exactly equal to the spot exchange rate that is expected on the delivery date specified in the forward contract...." Therefore, the expected spot rate in one year is 120.63 yen/$. 2g. 1+IJPN/1+IUS=1+rJPN/1+rUS. 1.089/1.065=1.023. Therefore, Japanese inflation is expected to be 2.3% greater than in the US. Sincerely, Wonko