Exchange rates * Look at Table 27.1. a. How many Japanese yen do you get for your dollar? b. What is the three-month forward rate for yen? c. Is the yen at a forward discount or premium on the dollar? d. Use the one-year forward rate to calculate the annual percentage discount or premium on yen. e. If the one-year interest rate on dollars is 2.5% annually compounded, what do you think is the one-year interest rate on yen? f. According to the expectations theory, what is the expected spot rate for yen in three months’ time? g. According to purchasing power parity theory, what then is the expected difference in the three-month rate of price inflation in the United States and Japan?

Question

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Answer 1

Textbook Question

Chapter 27, Problem 1PS

Exchange rates* Look at Table 27.1.

a. How many Japanese yen do you get for your dollar?
b. What is the three-month forward rate for yen?
c. Is the yen at a forward discount or premium on the dollar?
d. Use the one-year forward rate to calculate the annual percentage discount or premium on yen.
e. If the one-year interest rate on dollars is 2.5% annually compounded, what do you think is the one-year interest rate on yen?
f. According to the expectations theory, what is the expected spot rate for yen in three months’ time?
g. According to purchasing power parity theory, what then is the expected difference in the three-month rate of price inflation in the United States and Japan?

a)

Expert Solution

Summary Introduction

To discuss: The Country J yen for a dollar.

Explanation of Solution

The Country J yen for a dollar is 112.61 yen for a dollar

b)

Expert Solution

Summary Introduction

To determine: 3-month forward rate for Country J yen.

Explanation of Solution

Using the 3-month forward rate:

The 3-month forward rate for Country J yen is 111.94

c)

Expert Solution

Summary Introduction

To discuss: Whether yen is at a forward premium or discount

Explanation of Solution

The dollar is at forward discount and yen is at a forward premium.

d)

Expert Solution

Summary Introduction

To determine: Annual percentage premium or discount on yen.

Explanation of Solution

Compute annual percentage premium or discount on yen:

Premium=¥112.61¥109.99–1=0.0238, or 2.38 %

e)

Expert Solution

Summary Introduction

To determine: 1-year interest rate on yen

Explanation of Solution

¥109.99¥112.61= 1+ryen1.025ryen= 0.001152, or 0.1152%

f)

Expert Solution

Summary Introduction

To determine: Expected spot rate for yen in 3 month.

Explanation of Solution

Expected spot rate for yen in 3 month is ¥111.94=$1

g)

Expert Solution

Summary Introduction

To determine: The expected difference in 3-month rate of price inflation in the Country U and Country J.

Explanation of Solution

Difference,

Differences=¥111.94 ¥112.61– 1=−0.00595, or–0.595%

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Answer 2

Textbook Question

Chapter 27, Problem 1PS

Exchange rates* Look at Table 27.1.

a. How many Japanese yen do you get for your dollar?
b. What is the three-month forward rate for yen?
c. Is the yen at a forward discount or premium on the dollar?
d. Use the one-year forward rate to calculate the annual percentage discount or premium on yen.
e. If the one-year interest rate on dollars is 2.5% annually compounded, what do you think is the one-year interest rate on yen?
f. According to the expectations theory, what is the expected spot rate for yen in three months’ time?
g. According to purchasing power parity theory, what then is the expected difference in the three-month rate of price inflation in the United States and Japan?

a)

Expert Solution

Summary Introduction

To discuss: The Country J yen for a dollar.

Explanation of Solution

The Country J yen for a dollar is 112.61 yen for a dollar

b)

Expert Solution

Summary Introduction

To determine: 3-month forward rate for Country J yen.

Explanation of Solution

Using the 3-month forward rate:

The 3-month forward rate for Country J yen is 111.94

c)

Expert Solution

Summary Introduction

To discuss: Whether yen is at a forward premium or discount

Explanation of Solution

The dollar is at forward discount and yen is at a forward premium.

d)

Expert Solution

Summary Introduction

To determine: Annual percentage premium or discount on yen.

Explanation of Solution

Compute annual percentage premium or discount on yen:

Premium=¥112.61¥109.99–1=0.0238, or 2.38 %

e)

Expert Solution

Summary Introduction

To determine: 1-year interest rate on yen

Explanation of Solution

¥109.99¥112.61= 1+ryen1.025ryen= 0.001152, or 0.1152%

f)

Expert Solution

Summary Introduction

To determine: Expected spot rate for yen in 3 month.

Explanation of Solution

Expected spot rate for yen in 3 month is ¥111.94=$1

g)

Expert Solution

Summary Introduction

To determine: The expected difference in 3-month rate of price inflation in the Country U and Country J.

Explanation of Solution

Difference,

Differences=¥111.94 ¥112.61– 1=−0.00595, or–0.595%

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Answer 3

Textbook Question

Chapter 27, Problem 1PS

Exchange rates* Look at Table 27.1.

a. How many Japanese yen do you get for your dollar?
b. What is the three-month forward rate for yen?
c. Is the yen at a forward discount or premium on the dollar?
d. Use the one-year forward rate to calculate the annual percentage discount or premium on yen.
e. If the one-year interest rate on dollars is 2.5% annually compounded, what do you think is the one-year interest rate on yen?
f. According to the expectations theory, what is the expected spot rate for yen in three months’ time?
g. According to purchasing power parity theory, what then is the expected difference in the three-month rate of price inflation in the United States and Japan?

a)

Expert Solution

Summary Introduction

To discuss: The Country J yen for a dollar.

Explanation of Solution

The Country J yen for a dollar is 112.61 yen for a dollar

b)

Expert Solution

Summary Introduction

To determine: 3-month forward rate for Country J yen.

Explanation of Solution

Using the 3-month forward rate:

The 3-month forward rate for Country J yen is 111.94

c)

Expert Solution

Summary Introduction

To discuss: Whether yen is at a forward premium or discount

Explanation of Solution

The dollar is at forward discount and yen is at a forward premium.

d)

Expert Solution

Summary Introduction

To determine: Annual percentage premium or discount on yen.

Explanation of Solution

Compute annual percentage premium or discount on yen:

Premium=¥112.61¥109.99–1=0.0238, or 2.38 %

e)

Expert Solution

Summary Introduction

To determine: 1-year interest rate on yen

Explanation of Solution

¥109.99¥112.61= 1+ryen1.025ryen= 0.001152, or 0.1152%

f)

Expert Solution

Summary Introduction

To determine: Expected spot rate for yen in 3 month.

Explanation of Solution

Expected spot rate for yen in 3 month is ¥111.94=$1

g)

Expert Solution

Summary Introduction

To determine: The expected difference in 3-month rate of price inflation in the Country U and Country J.

Explanation of Solution

Difference,

Differences=¥111.94 ¥112.61– 1=−0.00595, or–0.595%

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Answer 4

Textbook Question

Chapter 27, Problem 1PS

Exchange rates* Look at Table 27.1.

a. How many Japanese yen do you get for your dollar?
b. What is the three-month forward rate for yen?
c. Is the yen at a forward discount or premium on the dollar?
d. Use the one-year forward rate to calculate the annual percentage discount or premium on yen.
e. If the one-year interest rate on dollars is 2.5% annually compounded, what do you think is the one-year interest rate on yen?
f. According to the expectations theory, what is the expected spot rate for yen in three months’ time?
g. According to purchasing power parity theory, what then is the expected difference in the three-month rate of price inflation in the United States and Japan?

a)

Expert Solution

Summary Introduction

To discuss: The Country J yen for a dollar.

Explanation of Solution

The Country J yen for a dollar is 112.61 yen for a dollar

b)

Expert Solution

Summary Introduction

To determine: 3-month forward rate for Country J yen.

Explanation of Solution

Using the 3-month forward rate:

The 3-month forward rate for Country J yen is 111.94

c)

Expert Solution

Summary Introduction

To discuss: Whether yen is at a forward premium or discount

Explanation of Solution

The dollar is at forward discount and yen is at a forward premium.

d)

Expert Solution

Summary Introduction

To determine: Annual percentage premium or discount on yen.

Explanation of Solution

Compute annual percentage premium or discount on yen:

Premium=¥112.61¥109.99–1=0.0238, or 2.38 %

e)

Expert Solution

Summary Introduction

To determine: 1-year interest rate on yen

Explanation of Solution

¥109.99¥112.61= 1+ryen1.025ryen= 0.001152, or 0.1152%

f)

Expert Solution

Summary Introduction

To determine: Expected spot rate for yen in 3 month.

Explanation of Solution

Expected spot rate for yen in 3 month is ¥111.94=$1

g)

Expert Solution

Summary Introduction

To determine: The expected difference in 3-month rate of price inflation in the Country U and Country J.

Explanation of Solution

Difference,

Differences=¥111.94 ¥112.61– 1=−0.00595, or–0.595%

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Answer 5

Textbook Question

Answer 6

Textbook Question

Answer 7

a)

Expert Solution

Summary Introduction

To discuss: The Country J yen for a dollar.

Explanation of Solution

The Country J yen for a dollar is 112.61 yen for a dollar

b)

Expert Solution

Summary Introduction

To determine: 3-month forward rate for Country J yen.

Explanation of Solution

Using the 3-month forward rate:

The 3-month forward rate for Country J yen is 111.94

c)

Expert Solution

Summary Introduction

To discuss: Whether yen is at a forward premium or discount

Explanation of Solution

The dollar is at forward discount and yen is at a forward premium.

d)

Expert Solution

Summary Introduction

To determine: Annual percentage premium or discount on yen.

Explanation of Solution

Compute annual percentage premium or discount on yen:

Premium=¥112.61¥109.99–1=0.0238, or 2.38 %

e)

Expert Solution

Summary Introduction

To determine: 1-year interest rate on yen

Explanation of Solution

¥109.99¥112.61= 1+ryen1.025ryen= 0.001152, or 0.1152%

f)

Expert Solution

Summary Introduction

To determine: Expected spot rate for yen in 3 month.

Explanation of Solution

Expected spot rate for yen in 3 month is ¥111.94=$1

g)

Expert Solution

Summary Introduction

To determine: The expected difference in 3-month rate of price inflation in the Country U and Country J.

Explanation of Solution

Difference,

Differences=¥111.94 ¥112.61– 1=−0.00595, or–0.595%

Answer 8

a)

Expert Solution

Summary Introduction

To discuss: The Country J yen for a dollar.

Explanation of Solution

The Country J yen for a dollar is 112.61 yen for a dollar

Answer 9

a)

Expert Solution

Answer 10

a)

Expert Solution

Answer 11

Expert Solution

Answer 12

Summary Introduction

To discuss: The Country J yen for a dollar.

Answer 13

Explanation of Solution

The Country J yen for a dollar is 112.61 yen for a dollar

Answer 14

b)

Expert Solution

Summary Introduction

To determine: 3-month forward rate for Country J yen.

Explanation of Solution

Using the 3-month forward rate:

The 3-month forward rate for Country J yen is 111.94

Answer 15

b)

Expert Solution

Answer 16

b)

Expert Solution

Answer 17

Expert Solution

Answer 18

Summary Introduction

To determine: 3-month forward rate for Country J yen.

Answer 19

Explanation of Solution

Using the 3-month forward rate:

The 3-month forward rate for Country J yen is 111.94

Answer 20

c)

Expert Solution

Summary Introduction

To discuss: Whether yen is at a forward premium or discount

Explanation of Solution

The dollar is at forward discount and yen is at a forward premium.

Answer 21

c)

Expert Solution

Answer 22

c)

Expert Solution

Answer 23

Expert Solution

Answer 24

Summary Introduction

To discuss: Whether yen is at a forward premium or discount

Answer 25

Explanation of Solution

The dollar is at forward discount and yen is at a forward premium.

Answer 26

d)

Expert Solution

Summary Introduction

To determine: Annual percentage premium or discount on yen.

Explanation of Solution

Compute annual percentage premium or discount on yen:

Premium=¥112.61¥109.99–1=0.0238, or 2.38 %

Answer 27

d)

Expert Solution

Answer 28

d)

Expert Solution

Answer 29

Expert Solution

Answer 30

Summary Introduction

To determine: Annual percentage premium or discount on yen.

Answer 31

Explanation of Solution

Compute annual percentage premium or discount on yen:

Premium=¥112.61¥109.99–1=0.0238, or 2.38 %

Answer 32

e)

Expert Solution

Summary Introduction

To determine: 1-year interest rate on yen

Explanation of Solution

¥109.99¥112.61= 1+ryen1.025ryen= 0.001152, or 0.1152%

Answer 33

e)

Expert Solution

Answer 34

e)

Expert Solution

Answer 35

Expert Solution

Answer 36

Summary Introduction

To determine: 1-year interest rate on yen

Answer 37

Explanation of Solution

¥109.99¥112.61= 1+ryen1.025ryen= 0.001152, or 0.1152%

Answer 38

f)

Expert Solution

Summary Introduction

To determine: Expected spot rate for yen in 3 month.

Explanation of Solution

Expected spot rate for yen in 3 month is ¥111.94=$1

Answer 39

f)

Expert Solution

Answer 40

f)

Expert Solution

Answer 41

Expert Solution

Answer 42

Summary Introduction

To determine: Expected spot rate for yen in 3 month.

Answer 43

Explanation of Solution

Expected spot rate for yen in 3 month is ¥111.94=$1

Answer 44

g)

Expert Solution

Summary Introduction

To determine: The expected difference in 3-month rate of price inflation in the Country U and Country J.

Explanation of Solution

Difference,

Differences=¥111.94 ¥112.61– 1=−0.00595, or–0.595%

Answer 45

g)

Expert Solution

Answer 46

g)

Expert Solution

Answer 47

Expert Solution

Answer 48

Summary Introduction

To determine: The expected difference in 3-month rate of price inflation in the Country U and Country J.

Answer 49

Explanation of Solution

Difference,

Differences=¥111.94 ¥112.61– 1=−0.00595, or–0.595%

Answer 50

Ch. 27 - Exchange rates Look at Table 27.1. a. How many...Ch. 27 - Exchange rates Table 27.1 shows the 3-month...Ch. 27 - Prob. 3PS Ch. 27 - Prob. 4PS Ch. 27 - Prob. 5PS Ch. 27 - Prob. 6PS Ch. 27 - Prob. 8PS Ch. 27 - Prob. 9PS Ch. 27 - Prob. 10PS Ch. 27 - Currency risk Companies may be affected by changes...

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