International Monetary Econ

Chapter 1

Question 1,2,3,4 (OPTIONAL)

1. The data in Table 12-1 (Links to an external site.)Links to an external site. end in 2011. Visit the U.S. Bureau of Economic Analysis at bea.gov (Links to an external site.)Links to an external site. to find information for the latest full calendar year (or for the last four quarters). What is the latest estimate of the size of the annual U.S. current account deficit in billions of dollars?

2. The data in Figure 12-1 (Links to an external site.)Links to an external site. end in 2012. Visit oanda.com (Links to an external site.)Links to an external site. (or another site with daily exchange rate data) and download data on the same exchange rates (yuan per dollar and dollar per euro) for the past 12 months. What are the rates today? What were they a year ago? By what percentage amount did the rates change? Do you think the rates are floating or fixed? Why?

3. The data in Figure 12-3 (Links to an external site.)Links to an external site. end in the year 2011. Find the IMF’s World Economic Outlook Databases. (Hint: Try searching “world economic outlook databases.”) Use this interactive tool to obtain the latest data on current accounts in U.S. dollars for all countries (actual data or IMF estimates). Which countries had the 10 largest deficits last year? Which countries had the 10 largest surpluses last year?

4. (OPTIONAL) Visit the Financial Times website (at ft.com (Links to an external site.)Links to an external site. click on “Market data”) to download data for country risk today. (Hint: Try searching “FT high-yield emerging markets.”) Which three emerging market countries have the highest spreads on their U.S. dollar debt? Which three have the lowest?

 

Chapter 2

Question 1,5, 6, 7

1. Refer to the exchange rates given in the following table:

Based on the table provided, answer the following questions:

a. Compute the U.S. dollar–yen exchange rate E$/¥ and the U.S. dollar–Canadian dollar exchange rate E$/C$ on June 25, 2010, and June 25, 2009.

b. What happened to the value of the U.S. dollar relative to the Japanese yen and Canadian dollar between June 25, 2009, and June 25, 2010? Compute the percentage change in the value of the U.S. dollar relative to each currency using the U.S. dollar-foreign currency exchange rates you computed in (a).

c. Using the information in the table for June 25, 2010, compute the Danish krone–Canadian dollar exchange rate Ekrone/C$.

d. Visit the website of the Board of Governors of the Federal Reserve System at http://www.federalreserve.gov/ (Links to an external site.)Links to an external site.. Click on “Economic Research and Data” and then “Statistics: Releases and Historical Data.” Download the H.10 release Foreign Exchange Rates (weekly data available). What has happened to the value of the U.S. dollar relative to the Canadian dollar, Japanese yen, and Danish krone since June 25, 2010?

HINT:http://www.federalreserve.gov/releases/h10/current/

a. Using the information from (d), what has happened to the value of the U.S. dollar relative to the British pound and the euro? Note: The H.10 release quotes these exchange rates as U.S. dollars per unit of foreign currency in line with long-standing market conventions.

5. Suppose quotes for the dollar–euro exchange rate E$/€ are as follows: in New York $1.50 per euro, and in Tokyo $1.55 per euro. Describe how investors use arbitrage to take advantage of the difference in exchange rates. Explain how this process will affect the dollar price of the euro in New York and Tokyo.

6. Consider a Dutch investor with 1,000 euros to place in a bank deposit in either the Netherlands or Great Britain. The (one-year) interest rate on bank deposits is 2% in Britain and 4.04% in the Netherlands. The (one-year) forward euro–pound exchange rate is 1.575 euros per pound and the spot rate is 1.5 euros per pound. Answer the following questions, using the exact equations for UIP and CIP as necessary.

a. What is the euro-denominated return on Dutch deposits for this investor?

b. What is the (riskless) euro-denominated return on British deposits for this investor using forward cover?

c. Is there an arbitrage opportunity here? Explain why or why not. Is this an equilibrium in the forward exchange rate market?

d. If the spot rate is 1.5 euros per pound, and interest rates are as stated previously, what is the equilibrium forward rate, according to covered interest parity (CIP)?

e. Suppose the forward rate takes the value given by your answer to (d). Compute the forward premium on the British pound for the Dutch investor (where exchange rates are in euros per pound). Is it positive or negative? Why do investors require this premium/discount in equilibrium?

f. If uncovered interest parity (UIP) holds, what is the expected depreciation of the euro (against the pound) over one year?

g. Based on your answer to (f), what is the expected euro–pound exchange rate one year ahead?

7. You are a financial adviser to a U.S. corporation that expects to receive a payment of 40 million Japanese yen in 180 days for goods exported to Japan. The current spot rate is 100 yen per U.S. dollar (E$/¥ = 0.01000). You are concerned that the U.S. dollar is going to appreciate against the yen over the next six months.

a. Assuming the exchange rate remains unchanged, how much does your firm expect to receive in U.S. dollars?

b. How much would your firm receive (in U.S. dollars) if the dollar appreciated to 110 yen per U.S. dollar (E$/¥ = 0.00909)?

c. Describe how you could use an options contract to hedge against the risk of losses associated with the potential appreciation in the U.S. dollar.