Interest rate parity, covered arbitrage, relative purchasing power parity and a real exchange rate, each computed on baht and yen quotes, fill this finished GF581 Unit 2 exchange rate exercise. Searches like "gf 581 unit 2 assignment example", "gf581 unit 2 sample" and "gf581 unit 2 example" land here.
What a finished GF581 Unit 2 exchange rate exercise looks like
Five numbered parts across about five pages, each with inputs, working and a closing sentence. Inputs sit in one box: spot at 34.00 baht and 148.00 yen per dollar, one-year deposit rates of 4.25 percent in dollars, 1.75 in baht and 0.75 in yen, and expected inflation of 2.8 percent in the United States and 0.9 in Thailand. Part one derives the one-year forward from interest rate parity, 33.1847 baht, a 2.46 percent premium on the baht, and 143.03 yen. Part two sets a quoted 33.05 against parity and runs the covered arbitrage on one million dollars, clearing 4,247. Part three applies relative purchasing power parity for an expected 33.37. Part four finds the baht's real value down 9.07 percent over the prior year. Part five states the forecast.
How a GF581 Unit 2 example is structured
The order runs from relationships that must hold to ones that hold only on average. Interest rate parity comes first because arbitrage enforces it within transaction costs, which is why part two treats a violation as money rather than opinion and prices the round trip in both currencies. Purchasing power parity follows as a long-run tendency, and the exercise says plainly that it explains little over a single year. Part four reconciles the two: the prior year's move from 31.50 to 34.00 baht per dollar, set against lower Thai inflation, left the baht cheaper in real terms, which helps the composite membrane maker's Rayong costs against dollar prices. Part five adopts the parity forward of 33.18 as a neutral anchor, notes that forward rates have tracked later spot rates poorly in published tests, and brackets it from 31.19 to 35.18.
One box of inputs
Spot quotes, deposit rates for three currencies and two inflation expectations sit together at the top, each labeled composite and dated, so every later part draws on the same figures and a grader can check any line against them.
Parity forward in two currencies
34.00 times 1.0175 over 1.0425 gives 33.1847; the yen forward reaches 143.03 by the same ratio. Each result carries a sentence on which currency trades at a forward premium and why lower interest produces it.
Arbitrage priced to the dollar
Borrow one million dollars, convert, deposit baht at 1.75 percent for THB 34,595,000, sell forward at 33.05 and collect 1,046,747 against 1,042,500 owed. The 4,247 left over is the gap parity says should close.
Real value, not the headline rate
Nominal depreciation of 7.35 percent becomes 9.07 in real terms once Thai inflation below the US rate is counted. The exercise reads it as a cost advantage for baht-built membrane elements sold in dollars.
A forecast offered last
Parity sets the central figure at 33.18 and a band of six percent either side, 31.19 to 35.18. The part closes by saying that the band, not the point, is what later valuation work should carry.
Where marks go in GF581 Unit 2
Exchange rate exercises in GF581 lose most on quote direction. A rate given as baht per dollar and then treated as dollars per baht flips every premium, and one inversion in part one can travel through every later part with correct arithmetic and wrong signs. A covered arbitrage that stops at the rate comparison, with no round trip and no profit shown in currency, also costs marks in many sections, since the round trip is the evidence. Treating purchasing power parity as a one-year forecast is the conceptual loss: the relationship describes drift over long horizons, and a sound answer says so. Forecasts asserted with no parity anchor, or offered as a single figure with no band, usually forfeit the forecast criterion. Unlabeled rounding across parts draws small deductions.
Get a GF581 Unit 2 example written to your instructions
Quotes, rates and the currency pair usually come with the problem set for Unit 2; forward it unchanged, with the rubric and any instructor conventions on rounding or quote direction. A custom worked exercise using those numbers returns within 24-48h, free for a first request, with every part solved in the sequence your section lists.
GF581 Unit 2 questions, answered
Which quote convention should the exercise use?
The one your problem set uses, stated once at the top and never switched. Most of the course's formulas work in either direction if numerator and denominator stay consistent, but mixing conventions inside one answer is the most common source of wrong signs. Writing the pair with its units beside every figure, baht per dollar for example, prevents it.
Why does the lower-interest currency trade at a forward premium?
Because a forward price has to leave no profit from borrowing one currency and depositing the other. If baht deposits pay less than dollar deposits, the baht must cost more forward than spot to offset the lower interest, or traders could lock in a riskless gain. The premium is a statement about interest rates, not a forecast that the currency will appreciate.
Should the forecast rest on purchasing power parity or interest rate parity?
Usually interest rate parity as the anchor, because it uses market prices available today, with purchasing power parity as a check on whether the currency looks far from long-run value. Neither predicts next year's rate well. What earns the marks is a stated method, a band around the central figure, and a sentence on which later decision the band will feed.