1. The U.

S inflation rate is expected to average 4% annually, while the Indian inflation rate is
expected to average about 7% p.a. If the current spot exchange rate for the dollar is
Rs66.70, what is the expected spot rate two years hence?
2. Suppose over period of two years, the U.S price index moves from 110 to125 and the
Japanese Index moves from 105 to 110. The spot exchange rate is $=112 JPY, what would be
the spot exchange rate in 2years.
3. Calculate the 3 months forward exchange rate ,if the current spot rate is 1.4893 DM/$ and
the three months annualised interest rates are 4% and 4.5% for $ and DM respectively
4. If the $: JPY rate is $=100JPY and the interest rates in Tokyo and New York are 3% and 4.5%
respectively, what is the expected exchange rate one year hence?
5. If the expected inflation rate is 10% and the real rate of return is 6%, what is the nominal
interest rate according to Fisher Effect.

6. Due to the integrated nature of their capital markets, investors in both the U.S. and U.K.
require the same real interest rate, 2.5%, on their lending. There is a consensus in capital
markets that the annual inflation rate is likely to be 3.5% in the U.S. and 1.5% in the U.K. for
the next three years. The spot exchange rate is currently $1.50/£.

a. Compute the nominal interest rate per annum in both the U.S. and U.K., assuming that the
Fisher effect holds.
b. What is your expected future spot dollar-pound exchange rate in three years from now?
c. Can you infer the forward dollar-pound exchange rate for one-year maturity?

7. Omni Advisors, an international pension fund manager, uses the concepts of purchasing
power parity , interest rate parity theory and to forecast spot exchange rates. The following
details are available-
Base price level 100
Current U.S price level 105
Current South African Price Level 111
Current rand spot exchange rate $0.175
Expected U.S one year interest rate 10%
Expected South African one year interest rate 8%
Calculate the expected spot ZAR rate according to PPP and IRP.

8. The following are the exchange rates-

CAD 1.317/$ (Spot)
CAD 1.2950/$ (6 months forward)
6 months interest rate
$-10% and CD - 6%. Work out the arbitrage gain, if any
 9. Given the following data,
Spot rate- Rs65.002/$
6 months forward- Rs65.9010/$
6 months Interest rate- $- 7% and Rs-12%. Work out the arbitrage gain,if any.

10. Currently, the spot exchange rate is $1.50/£ and the three month forward exchange rate is
$1.52/£. The three month interest rate is 8% p.a in the U.S and 5.8% p.a in the U.K. Assume
that you can borrow as much as $1500000 or £ 1000000.

a. Determine whether interest rate parity is currently holding

b. If IRP is not holding, how would you carry out covered interest arbitrage?
c. Explain how IRP will be restored as a result of covered interest arbitrage

11. Assume that Indian Rupee is fully convertible on both current account and capital account
and also assume that you are allowed to borrow in any currency in any market and the
following information is available to you.
Spot- Brazil Real= ₹ 16.6244-16.6395
3 month forward: ₹ 16.5012-16.5520
3month rupee rate annualised- 7.25%-8.25%
3 month Real interest rate-5.75-6.25%
Is there any covered interest arbitrage, Show in detail.

12. In July, the one year interest rate is 12% on British Pounds and 9% on U.S dollars-
a. If the current exchange rate is$1.63/£, what is the expected future exchange rate in one
year?
b. Suppose a change in expectations regarding future U.S. inflation causes the expected future
spot rate to decline to $1.52/£. What should happen to U.S interest rate?