国际金融课后习题答案.doc

You are given the following information about a countrys international transactions during a year:a.Calculate the values of the countrys goods and services balance,current account balance,and official settlements balance?a.Merchandise trade balance: $330 - 198 = $132 Goods and services balance: $330 - 198 + 196 - 204 = $124 Current account balance: $330 - 198 + 196 - 204 + 3 - 8 = $119Official settlements balance: $330 - 198 + 196 - 204 + 3 - 8 + 102 - 202 + 4 = $23b.What are the value of the change in official reserve assets(net)?Is the country increasing or decreasing its net holdings of official reserve assets?b.Change in official reserve assets (net) = - official settlements balance = -$23The country is increasing its net holdings of official reserve assets.What are the major types of transactions or activities that result in supply of foreign currency in the spct foreign exchange market?Exports of merchandise and services result in supply of foreign currency in the foreign exchange market. Domestic sellers often want to be paid using domestic currency, while the foreign buyers want to pay in their currency. In the process of paying for these exports, foreign currency is exchanged for domestic currency, creating supply of foreign currency. International capital inflows result in a supply of foreign currency in the foreign exchange market. In making investments in domestic financial assets, foreign investors often start with foreign currency and must exchange it for domestic currency before they can buy the domestic assets. The exchange creates a supply of foreign currency. Sales of foreign financial assets that the countrys residents had previously acquired, and borrowing from foreigners by this countrys residents are other forms of capital inflow that can create supply of foreign currency. You have access to the following three spot exchange rates:0.01/YEN0.20/KRONE25YEN/KRONEYou strat with dollars and want to end up with dollarsa.hoe would you engage in arbitrage to profit from these three rates?what is the profit for each dollar used initially?a.The cross rate between the yen and the krone is too high (the yen value of the krone is too high) relative to the dollar-foreign currency exchange rates. Thus, in a profitable triangular arbitrage, you want to sell kroner at the high cross rate. The arbitrage will be: Use dollars to buy kroner at $0.20/krone, use these kroner to buy yen at 25 yen/krone, and use the yen to buy dollars at $0.01/yen. For each dollar that you sell initially, you can obtain 5 kroner, these 5 kroner can obtain 125 yen, and the 125 yen can obtain $1.25. The arbitrage profit for each dollar is therefore 25 cents.b.As a result of this arbitrage,what is the pressure on the cross-rate between yen and krone?what must the value of the cross-rate be to eliminate the opportunity for triangular arbitrage?b.Selling kroner to buy yen puts downward pressure on the cross rate (the yen price of krone). The value of the cross rate must fall to 20 (=0.20/0.01) yen/krone to eliminate the opportunity for triangular arbitrage, assuming that the dollar exchange rates are unchanged.Explain the nature of the exchange rate risk for each of the following,from the perspective of the U.S frim or person.in your answer,include whether each is a long or short position in foreign currency.a.a small U.S firm sold experimental computer computer compoments to a Japanese firm,and it will receive payment of 1 million yen in 60 days.a.The U.S. firm has an asset position in yenit has a long position in yen. To hedge its exposure to exchange rate risk, the firm should enter into a forward exchange contract now in which the firm commits to sell yen and receive dollars at the current forward rate. The contract amounts are to sell 1 million yen and receive $9,000, both in 60 days.The current spot exchange rate is 1.20/euro.the current 90-day forward exchange rate is1.18/euro.you expect the spot rate to be 1.22/euro in 90 days.how would you speculate using a forward contract?if many people speculate in this way,what pressure is placed on the walue of the current forward exchange rate?Relative to your expected spot value of the euro in 90 days ($1.22/euro), the current forward rate of the euro ($1.18/euro) is lowthe forward value of the euro is relatively low. Using the principle of buy low, sell high, you can speculate by entering into a forward contract now to buy euros at $1.18/euro. If you are correct in your expectation, then in 90 days you will be able to immediately resell those euros for $1.22/euro, pocketing a profit of $0.04 for each euro that you bought forward. If many people speculate in this way, then massive purchases now of euros forward (increasing the demand for euros forward) will tend to drive up the forward value of the euro, toward a current forward rate of $1.22/euro.The following rates are available in the markets:Current spot exchange rate: 0.500/SFrCurrent 30-day forward exchange rate: 0.505/SFrAnnualized interest rate on 30-day dollar-denominated bonds:12%(1.0% for 30 days)Annualized interest rate on 30-day Swiss franc-denominated bonds:6%(0.5% for 30 days)a.Is the swiss franc at a forward premium or discount?a.The Swiss franc is at a forward premium. Its current forward value ($0.505/SFr) is greater than its current spot value ($0.500/SFr).b.should a U.S-based investor make a covered investment in swiss franc-denominated 30-day bonds,rather than investing 30-day dollar-denominated bonds?Explain.b.The covered interest differential in favor of Switzerland is (1 + 0.005)(0.505) / 0.500) - (1 + 0.01) = 0.005. (Note that the interest rate used must match the time period of the investment.) There is a covered interest differential of 0.5% for 30 days (6 percent at an annual rate). The U.S. investor can make a higher return, covered against exchange rate risk, by investing in SFr-denominated bonds, so presumably the investor should make this covered investment. Although the interest rate on SFr-denominated bonds is lower than the interest rate on dollar-denominated bonds, the forward premium on the franc is larger than this difference, so that the covered investment is a good idea.c.Because of covered interest arbitrage,what pressures are placed on the various rates?if the only rate that actually changes is forward exchange rate,to what value will it bu driven?c.The lack of demand for dollar-denominated bonds (or the supply of these bonds as investors sell them in order to shift into SFr-denominated bonds) puts downward pressure on the prices of U.S. bondsupward pressure on U.S. interest rates. The extra demand for the franc in the spot exchange market (as investors buy SFr in order to buy SFr-denominated bonds) puts upward pressure on the spot exchange rate. The extra demand for SFr-denominated bonds puts upward pressure on the prices of Swiss bondsdownward pressure on Swiss interest rates. The extra supply of francs in theforward market (as U.S. investors cover their SFr investments back into dollars) puts downward pressure on the forward exchange rate. If the only rate that changes is the forward exchange rate, this rate must fall to about $0.5025/SFr. With this forward rate andthe other initial rates, the covered interest differential is close to zero.Why is testing whether uncovered interest parity holds for actual rates more difficult than testing whether covered interest parity holds?In testing covered interest parity, all of the interest rates and exchange rates that are needed to calculate the covered interest differential are rates that can observed in the bond and foreign exchange markets. Determining whether the covered interest differential is about zero (covered interest parity) is then straightforward (although some more subtle issues regarding timing of transactions may also need to be addressed). In order to test uncovered interest parity, we need to know not only three ratestwo interest rates and the current spot exchange ratethat can be observed in the market, but also one ratethe expected future spot exchange ratethat is not observed in any market. The tester then needs a way to find out about investors expectations. One way is to ask them, using a survey, but they may not say exactly what they really think. Another way is to examine the actual uncovered interest differential after we know what the future spot exchange rate actually turns out to be, and see whether the statistical characteristics of the actual uncovered differential are consistent with an expected uncovered differential of about zero (uncovered interest parity)the following rates currently exist:spot exchange rate: 1.000/euro.Annual interest rate on 180-day euro-denominated bonds:3%Annual interest rate on 180-day U.S dollar-denominated bonds:4%Ibvestors currently expect the spot exchange rate to be about1.005/euro in180 days.a.show that uncovered interest parity holds(approximately)at these ratesa.The euro is expected to appreciate at an annual rate of approximately (1.005 - 1.000)/1.000)(360/180)100 = 1%. The expected uncovered interest differential is approximately 3% + 1% - 4% = 0, so uncovered interest parity holds (approximately).What is likely to be the effect on the spot eschange rate if the interest rate on 180-day dollar-denominated bonds declines to 3%? If the euro interest rate and the expected future spot rate are unchanged,and if uncovered interest parity is reestablished,what will the new current spot exchange rate be?has the dollar appreciated or depreciated?b.If the interest rate on 180-day dollar-denominated bonds declines to 3%, then the spot exchange rate is likely to increasethe euro will appreciate, the dollar depreciate. At the initial current spot exchange rate, the initial expected future spot exchange rate, and the initial euro interest rate, the expected uncovered interest differential shifts in favor of investing in euro-denominated bonds (the expected uncovered differential is now positive, 3% + 1% - 3% = 1%, favoring uncovered investment in euro-denominated bonds. The increased demand for euros in the spot exchange market tends to appreciate the euro. If the euro interest rate and the expected future spot exchange rate remain unchanged, then the current spot rate must change immediately to be $1.005/euro, to reestablish uncovered interest parity. When the current spot rate jumps to this value, the euros exchange rate value is not expected to change in value subsequently during the next 180 days. The dollar has depreciated immediately, and the uncovered differential then again is zero (3% + 0% - 3% = 0)You observe the following current rates:Spot exchange rate: 0.01/yenAnnual interest rate on 90-day U.S dollar-denominated bonds:4%Annual interest rate on 90-day yen-denominated bonds:4%a.if uncovered interest parity holds,what spot exchange rate do investors expect to exist in 90 days?a.For uncovered interest parity to hold, investors must expect that the rate of change in thespot exchange-rate value of the yen equals the interest rate differential, which is zero.Investors must expect that the future spot value is the same as the current spot value,$0.01/yen.b.a close U.S presidential has just been decided.the candidate whom international investors view as the stronger and more probusiness person won.because of this,investors expect the exchange rate to be0.0095/yen in 90 days.what will happen in the foreign exchange market?b.If investors expect that the exchange rate will be $0.0095/yen, then they expect the yen to depreciate from its initial spot value during the next 90 days. Given the other rates, investors tend to shift their investments toward dollar-denominated investments. The extra supply of yen (and demand for dollars) in the spot exchange market results in a decrease in the current spot value of the yen (the dollar appreciates). The shift to expecting that the yen will depreciate (the dollar appreciate) sometime during the next 90 days tends to cause the yen to depreciate (the dollar to appreciate) immediately in the current spot market.To aid in its efforts to get reelected,the current government of o country decides to increase the growth rate of the domestic money supply by two percentage points.the increased growth rate becomes”permanene”because once started it is difficult to reverse.a.according to the monetary approach,how will this affect the long-run trend for the exchange rate value of the countrys currency?a.Because the growth rate of the domestic money supply (M s ) is two percentage points higher than it was previously, the monetary approach indicates that the exchange rate value (e) of the foreign currency will be higher than it otherwise would bethat is, the exchange rate value of the countrys currency will be lower. Specifically, the foreign currency will appreciate by two percentage points more per year, or depreciate by two percentage points less. That is, the domestic currency will depreciate by two percentage points more per year, or appreciate by two percentage points less.b.explain why the nominal exchange rate trend is affected,referring to PPPb.The faster growth of the countrys money supply eventually leads to a faster rate of inflation of the domestic price level (P). Specifically, the inflation rate will be two percentage points higher than it otherwise would be. According to relative PPP, a faster rate of increase in the domestic price level (P) leads to a higher rate of appreciation of the foreign currency. A country has a marginal propensity to save of 0.15 and a marginal propensity to import of 0.4 real domestic spending now decreases by2 billiona.according to the spending multiplier(for a small open economy),by how much will domestic product and income change?a.The spending multiplier in this small open economy is about 1.82 (= 1/(0.15 + 0.4). If real spending initially declines by $2 billion, then domestic product and income will decline by about $3.64 billion (= 1.82$2 billion) b.what is the change in the countrys imports?b. If domestic product and income decline by $3.64 billion, then the countrys imports will decline by about $1.46 billion (= $3.64 billion0.4). c.if this country is large,what effect will this have on foreign product and income?explainc. The decrease in this countrys imports reduces other countries exports, so foreign product and income decline. d.will the change in foreign product and income tend to counteract or reinforce the change in the first countrys domestic product and income?explaind. The decline