1.  (a) The euro/U.S. dollar rate rises. (b) The U.S. dollar/pound rate falls. (c) The yen/U.S. dollar rate falls. (d) The U.S. dollar/Canadian dollar rate rises.

 2.  The euro has appreciated; the Japanese yen and British pound have depreciated.

 3.  The exchange rate will not change. The theory assumes that real exchange rates are unchanged.

 4.  The euro/dollar rate is 550.500 and the yen/dollar rate is 150,000/500.

 5.  Both appreciate relative to the dollar.

 6.  (a)   EX_r = EX(P)/P_f = (200 yen/$)($16/CD)/(3,500 yen/CD) = 0.914.

(b)  EX_r = EX(P)/P_f = 1/2 pound/$)($16/CD)/(6 pounds/CD) = 1.333.

 7. The difference is trade today (spot transaction) versus trade in future (forward transaction). A futures contract offers greater liquidity and lower information costs.

 8. An option is the right to buy or sell an asset at a predetermined price by a predetermined time. An option buyer has the right to buy or sell the underlying asset; an option seller has the obligation to sell or buy underlying asset. In a call option, the buyer has the right to buy; in a put option, the buyer has the right to sell.

 9. A hedge transaction reduces risk for the hedger; in speculation a trader accepts increased risk for greater potential profit.

 10. At a price of 60, the put is in the money; at a price of 70, neither is in the money; at a price of 80, the call is in the money.

 11. Investors who bought put options would benefit by being able to purchase stock at prices below the strike price in their options contracts. Investors who sold put options would be hurt by having to buy stock at prices above their current market values.

 12. Buy both put and call options, so if the price swing is large enough you can profit no matter which way the court ruling goes. There is a potential problem: The market price on the options contract may reflect this information, so your opportunity to profit may be lost.