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4. Income Effects on Exchange Rates Assume that the U.S. income level rises at a much higher rate than does the Canadian income level. Other things being equal, how should this affect the (a) U.S. demand for Canadian dollars, (b) supply of Canadian dollars for sale, and (c) equilibrium value of the Canadian dollar?

16. Economic Impact on Capital Flows How do you think the weaker U.S. economic conditions could affect capital flows? If capital flows are affected, how would this influence the value of the dollar (holding other factors constant)?

7. Speculating with Currency Options When should a speculator purchase a call option on Australian dollars? When should a speculator purchase a put option on Australian dollars?

25. Estimating Profits from Currency Futures and Options One year ago, you sold a put option on 100,000 euros with an expiration date of 1 year. You received a premium on the put option of $.04 per unit. The exercise price was $1.22. Assume that 1 year ago, the spot rate of the euro was $1.20, the 1-year forward rate exhibited a discount of 2 percent, and the 1-year futures price was the same as the 1-year forward rate. From 1 year ago to today, the euro depreciated against the dollar by 4 percent. Today the put option will be exercised (if it is feasible for the buyer to do so).

a. Determine the total dollar amount of your profit or loss from your position in the put option.

b. Now assume that instead of taking a position in the put option 1 year ago, you sold a futures contract on 100,000 euros with a settlement date of 1 year. Determine the total dollar amount of your profit or loss.

6. Currency Effects on Economy What is the impact of a weak home currency on the home economy, other things being equal? What is the impact of a strong home currency on the home economy, other things being equal?

19. Pegged Currencies Why do you think a country suddenly decides to peg its currency to the dollar or some other currency? When a currency is unable to maintain the peg, what do you think are the typical forces that break the peg?

18. Limitations of Covered Interest Arbitrage Assume that the 1-year U.S. interest rate is 11 percent, while the 1-year interest rate in Malaysia is 40 percent. Assume that a U.S. bank is willing to purchase the currency of that country from you 1 year from now at a discount of 13 percent. Would covered interest arbitrage be worth considering? Is there any reason why you should not attempt covered interest arbitrage in this situation? (Ignore tax effects.)

27. Interpreting Changes in the Forward Premium Assume that interest rate parity holds. At the beginning of the month, the spot rate of the Canadian dollar is $.70, while the 1-year forward rate is $.68. Assume that U.S. interest rates increase steadily over the month. At the end of the month, the 1-year forward rate is higher than it was at the beginning of the month. Yet, the 1-year forward discount is larger (the 1-year premium is more negative) at the end of the month than it was at the beginning of the month. Explain how the relationship between the U.S. interest rate and the Canadian interest rate changed from the beginning of the month until the end of the month.

28. Go to Yahoo! Finance’s Website, located at, and select a publicly traded company which interests you. Determine the company’s symbol (i.e., Apple = APPL) and navigate to the “SEC Filings” link on the left-hand side of the page under “COMPANY”. Review the debt structure of the company you have chosen by reading the company’s latest quarterly report and determining whether it has any convertible bonds or long-term debt. Recommend two actions that the selected company can take in order to optimize its capital structure. Provide a rationale for your recommendation.

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