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$($i$)$ If you accept these quotes, how many EUR,$SFr,$ and GBP do you have at

departure?

$($ii$)$ If you return with EUR $300,SFr1,000,$AND GBP $75,$ and the exchange rates are

unchanged, how many KES do you have?

$($iii$)$ Suppose that instead of selling your remaining EUR $300$ once you return home,

you want to sell them in Great Britain. At the train station, you are offered

GBP$/$EUR $0\mathrm{.}66-0\mathrm{.}68,$ while a bank three blocks from the station offers GBP$/$EUR

$0\mathrm{.}665-0\mathrm{.}675.$ At what rate are you willing to sell your EUR $300?$ How many GBP

will you receive?QUESTION ONE

The table below shows hypothetical values for the consumer price indexes $($CPI$)$ of the

U$.$S$.,$ the U$.$K$.,$ and Japan in $2014$ and $2015.$ Their currencies are also indicated as the

dollar $($$$),$ pound $(),$ and yen $()$ respectively.

Assume that exchange rates in $2014$ were: $\frac{\text{\$}}{}=1\mathrm{.}60,\frac{}{}=100,$ and $\frac{}{}=160.$

Required

$($a$)$ Calculate the following exchange rates for $2014$:

$($i$)\frac{f}{\text{\$}}$

$($ii$)\frac{\text{\$}}{}$

$($iii$)\frac{}{}$

$($b$)$ Calculate the following exchange rates for $2015,$ assuming that the Purchasing

Power Parity Theory holds:

$($i$),\frac{S}{}$

$($ii$),\frac{}{\text{\$}}$

$($iii$)\frac{}{}$

$($NB: The PPP theory says that the value of a country's currency relative to another

will depreciate at a rate equal to the difference between its own rate of inflation and

that of the other country $($appreciating$,$ of course, if the other country's inflation is

higher$)).$

$($c$)$ You have just graduated from the University of Nairobi and are leaving on a

whirlwind tour to see some friends. You wish to spend KES $200,000$ each in

Germany, Switzerland, and Great Britain $($KES $600,000$ in total$).$ Your bank

offers you the following bid$-$ask quotes KES$/$EUR $118\mathrm{.}5733-118\mathrm{.}8061$; KES$/$SFr

$107\mathrm{.}5774-107\mathrm{.}8778,$ and KES$/$GBP$162\mathrm{.}4144-162\mathrm{.}7600.$

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