- You can trade at the following prices:

- Spot rate MXN10/$
- 6-month forward rate MXN11/$
- 6-month Mexican interest rate 18%
- 6-month US interest rate 6%

- Is covered interest arbitrage worthwhile? If so, explain the steps and compute the profit based on an initial (time t=0) transaction of $1 million. Calculate your profit in dollars in one period.

- Currency exchange rates and Eurocurrencyinterest rates are as follows:

- Current Singapore dollar (S$) spot rate $0.50/S$
- 1-year Singapore dollar (S$) forward rate $0.51/S$
- 1-year Singapore dollar (S$) interest rate 4.0%
- 1-year US interest rate 6.0%

- In what direction will covered interest arbitrage force the quoted rates to change? Explain the steps and compute the profit based on a $1 million initial position.

- Suppose P(D) = 100, P(F) = 1 and S = D100/F. Inflation in countries D and F are expected to be P(D) = 10% and P(F) = 21% over the foreseeable future.

- What are the expected price levels and expected nominal exchange rate in one period?
- Looking two years into the future, what are the expected price levels in each country and the expected real exchange rate?

- One year ago, the spot exchange rate between Japanese yen and Swiss franc was Y160/SFr. Today, the spot rate is Y155/SFr. Inflation during the year was p(y) = 2% and p(SFr) = 3% in Japan and Switzerland, respectively.
- What was the percentage change in the nominal value of the Swiss Franc?
- One year ago, what nominal exchange rate would you have predicted for today based on the difference in inflation rates?
- What was the percentage change in the real exchange rate during the year?
- What was the percentage change in the relative purchasing power of the franc?
- What was the percentage change in the relative purchasing power of the yen?