Chapter 22, Problem 8QP

a.

Summary Introduction

To determine: The current spot exchange rate.

Answer to Problem 8QP

The current spot exchange rate is LAP 95.45 per dollar.

Explanation of Solution

Determine the current spot exchange rate

$\begin{array}{c}SpotExchangeRate=\left[\frac{\left(\frac{\left(1+InterestRat{e}_{Laputian}\right)}{\left(1+InterestRat{e}_{Dollar}\right)}\right)}{ForwardRate}\right]\\ =\left[\frac{\left(\frac{\left(1+10\%\right)}{\left(1+5\%\right)}\right)}{LAP100}\right]\\ =LAP95.45perdollar\end{array}$

Therefore, the current spot exchange rate is LAP 95.45 per dollar.  

b.

Summary Introduction

To determine: The USD interest rate.

Answer to Problem 8QP

The USD interest rate is 2.22%.

Explanation of Solution

Determine the USD interest rate

$\begin{array}{c}0=\left[\left(\frac{BeginningExchangeRat{e}_{LIL}}{EndingExchangeRat{e}_{LIL}}\right)\times \left(\frac{\left(1+InterestRat{e}_{LIL}\right)}{InterestRat{e}_{USD}}\right)\right]\\ 0=\left[\left(\frac{45}{40}\right)\times \left(\frac{\left(1+15\%\right)}{InterestRat{e}_{USD}}\right)\right]\\ 9\times \left(1+InterestRat{e}_{USD}\right)=9.2\\ =0.02222or2.22\%\end{array}$

Therefore, the USD interest rate is 2.22%.  

c.

Summary Introduction

To determine: The current exchange rate.

Answer to Problem 8QP

The current exchange rate is BLE 23.66 per dollar.

Explanation of Solution

Determine the current exchange rate

$\begin{array}{c}SpotExchangeRate=\left[\frac{\left(\frac{\left(1+InterestRat{e}_{\text{Blefuscu}}\right)}{\left(1+InterestRat{e}_{Dollar}\right)}\right)}{ForwardRate}\right]\\ =\left[\frac{\left(\frac{\left(1+12\%\right)}{\left(1+6\%\right)}\right)}{BLE25}\right]\\ =BLE23.66perdollar\end{array}$

Therefore, the current exchange rate is BLE 23.66 per dollar.