## (Solved) 4. a. A euro = \$1.25. b. The indirect value of the euro must have declined over the last month....

4.  a. A euro = \$1.25. b. The indirect value of the euro must have declined over the last month. c. The forward premium is 2 percent. If the forward rate is used to forecast, the ex- pected degree of appreciation over the next year is (\$.51 - \$.50)/\$.50 = 2%, which is the same as the forward rate premium. 5.   a. The peso is valued at \$.125 today. Since the peso appreciated, the U.S. exporters are favorably affected. b. The zloty was worth about \$.345 last year. Since the zloty depreciated, the U.S. importers were favorably affected. c. Last year, the cross rate of the peso in zloty = \$.10/\$.345 = .2898. Today, the cross rate of the peso in zloty = \$.125/\$.32 = .391. The percentage change is (.391  - .2898)/.2898  = 34.92%. 6.   a. Depreciate b. Appreciate c. Depreciate d. Appreciate 7.   a. The spot rate depreciated from \$1.20 to \$1.152. You receive \$.05 per  unit. The buyer of the put option exercises the option, and you buy the euros for \$1.22 and sell them in the spot market for \$1.152. Your gain on the put option per unit is (\$1.152 - \$1.22) + \$.05 = -\$.018. Total gain = -\$.018 X 100,000 = -\$1,800. b. The futures rate one year ago was equal to: \$1.20 X (1 - .02) = \$1.176. So the futures rate is \$1.176. The gain per unit is \$1.176 - \$1.152 = \$.024 and the total gain is \$.024 X 100,000 = \$2,400.

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