# Eco Questions

1. The U.S. interest rate is 4%, the Jordan interest rate is 7% and the /JOD spot rate is 2.0010. What is the /JOD forward rate that satisfies interest rate parity? A) \$0.5142 / JOD. B) \$1.9450 / JOD. C) 1.0936 / JOD. Question-2) The following chart indicates the production possibilities of food and drink per day in Country A and Country B. Units of Output Per Day Country A Country B Food 4 8 Drink 6 7 Which of the following statements about the chart is most accurate? A) Since B workers can produce more of food and drink than A workers, no gains from trade are possible. B) Mutual gains could be realized from trade if A specialized in drink production and B specialized in the food production. C) Mutual gains could be realized from trade if A specialized in food production and B specialized in drink production. Question-3) Assume an investor living in the United States can borrow in or in the Thai baht (THB). Given the following information, determine whether an arbitrage opportunity exists. If so, how much would the arbitrageur profit by borrowing 1,000,000 or the equivalent in baht? (Assume a period of one year and state the profit in domestic currency terms.) Spot rate (/baht) 0.02312 Forward rate (\$/baht) 0.02200 Domestic (U.S.) interest rate (%) 4.50% Foreign (Thailand) interest rate (%) 6.00% A) Borrow baht. Arbitrage profits are 36,349. B) Borrow . Arbitrage profits are \$36,349. C) Borrow foreign. Arbitrage profits are \$65,622. I have some doubt in all 3 questions, please post your answers and explanation if possible…
1. 2.001*1.04/1.07 = 1.9449 -> 1.9450 /JOD B 2. I am inclined to go with B. Country B has the advantage for Foodwrt A. Though A does not have the advantage for Drink, if both companies produced - and traded - profits would be higher. That is my reasoning for B. 3. Based on IRP -\> Forward Baht = 0.02279 (0.02312\*1.045/1.06) Forward is Underpriced. To take advantage - Buy Forward, (which means Short Sell Spot). Borrow 1000000 convert to Baht at Spot -> 43252595.16 Lend forward -> * 1.06 = 45847750.87 Convert @ 0.02200 -> 1008650.52 Need to return 1000000\*1.045 = 1045000 Profit = 1008650.52 - 1045000 = 36349.48 -> Ans B.

Thanks CP I see that I got 1 and 3 wrong because of incorrectly interpreting the exchange rates… /JOD spot rate is 2.0010, I assumed 1 = 2.0010 JOD however it should be 1JOD = 2.0010 USD, correct? Similarly, (/baht) 0.02312 , I assumed 1 = .02312 baht whereas it should be 1baht = .02312 dollar, correct?pls confirm Such mistakes a month before the exam For Ques2, I thought answer A was better, but answer is B, similar reasoning as yours…