FINA6321 - Solutions - Midterm #1 Review Questions - Dr.

Park
Chapters 1, 2, 3
1
Total net sales, HK$

200
45%
90
7.5
12

Percent of total sales from Europe

Total European sales, HK$
Average exchange rate, HK$/
Total European Sales, euros ()

2-4 Total Costs

Tubing costs (20%) in $
S(yuan/$)
Tubing costs in yuan
% revaluation
New S(yuan/$)
Tubing costs at new exchange rate
Total costs
% increase in total costs

Chapter 4
5-7 Goods: exports
Goods: imports
Balance of Trade
Services: credit
Services: debit
Balance on service
Income: credit
Income: debit
Balance on income
Current transfers: credit
Current transfers: debit
Balance on transfer
Balance on Current Account

20%

800000
160000
8.68
1388800
12%
7.75
179200
819200
2.40%

250
45%
112.50
10
11.25
-6.25%

=800000*0.2
=160000*8.68
=8.68/(1+0.12)
=1388800/7.75
=800000*(1-0.2)+179200
2.40%

50,000
60,000
-10,000 balance of trade = 50000-60000
15,000
17,000
-2,000
-12,000 balance of goods and services=-10000-200
6,000
20,000
-14,000
2,000
3,000

-1,000
-27,000 balance of current account
=-10000-2000-14000-1000

8-9 Current account balance

Capital account balance
Financial account balance
Net errors and omissions
Reserves and related items

-200
5
180
7
8

185 =5+180
8

Capital inflow
Reserve account decrease by

10-12 S (Private Savings)

I (Private Domestic Investment)
G (Government Spending)
T (Tax Revenues)

1000
800
700
600
(1000-800)+(600-700) = 200 + (-100)

100
=700-600
100
X-M = S-I + (T-G)=(1000-800)+(600-700)
200
S-I =1000-800 = (X-M) + (G-T)=100+(700-6
50.0%
=100/200
100
=200-100
Excessive domestic savings of 200 were spent partly for budget deficit (100),
and partly for net export (100).
Budget deficit = G - T
current account balance
excessive domestic savings
% of savings used for net export
foreign investment

Chapter 6
13

S($/)b = 1.50

S($/)a = 1.51

S(/$)b = 1 / S($/)a = 1 / 1.51 = .6623

S(/$)a = 1 / S($/)b = 1 / 1.50 = .6667
14
15

S(/SF) = S(/$) / S(SF/$) = 0.6 / 1.2 = 0.5

When the forward points are increasing, we need to add these to the spot rates.
For 12-16, forward rates are calculated as follows: 0.7560+.0012=.7572 0.7625+0.0016 = .7641

Bid-Ask rates = 0.7572 - 0.7641

When the forward points are decreasing, we need to subtract these from the sport rates.

For 16-12, forward rates are calculated as follows: 0.7560-.0016=.7544

Bid-Ask rates = 0.7544 - 0.7613
16
17

f 180 $ v SF = { (1.3 - 1.25) / 1.25 } x {360 / 180} = 8% forward premium

18

To sell for , he has to sell for $, and sell$ for .

Dealer buys ==> S($/)b
Dealer buys $ ==> S(/$)b

0.7625-0.0012= .761

Profit from short position = Forward price - future spot price = 0.6408 - 0.6386 = 0.0022

S(/)b = S($/)b S(/$)b= 1.5678 x 1.09531 = 1.7172

The customer gets 1,717,211 (=1.7172113 x 1,000,000).
19

To sell for , he has to sell for $, and sell$ for .

Dealer buys ==> S($/)b
Dealer buys $ ==> S(/$)b
S(/)b = S($/)b S(/$)b= 0.9120 x 0.6376 = 0.5814912
The customer gets 581,491 (=0.5814912 x 1,000,000).

20

S(SF/$)

1.6

S(CD/$)
1.33

S(SF/CD)

Implied S(SF/CD) = S(SF/$) / S(CD/$)

1.15

1.2030

CD is cheap.

CD is expensive.

SF is expensive.

SF is cheap.

Buy SF by selling $ at 1.6; Sell SF to buy CD at 1.15; Buy $ by selling CD at 1.33.

1,000,000 x 1.6 =
1. Buy SF by selling $ at the rate of 1.6.
1,600,000/1.15 =
2. Buy CD by selling SF at the rate of 1.15.
3. Sell CD and buy $ at the rate of 1.33.
1,391,304/1.33 =
1046093 - 1000000 =
$46,093
Profit =
21
22

1.78 $/
1.7865 $/

1/1.78 =

0.5618

/$ (B)
/$ (B)

23

1/1.7865 = 0.5598
Sb(/$)=114.2 ==> Fb(/$) = 114.2 - 20/100 = 114.2 - 0.2 = 114 (B)

24

Sa(/$)=1.7868 ==> Fa(/$) = 1.7868 - 230/10000 = 1.7868 - .023 = 1.7638

(B)

25
26

forward premium/doscount in European terms = (S - F) / F

(114.25-112.91)/112.91 x (360/180) = 2.37% premium
0.00770
129.87/$
==> ($/)
115.74
0.00864/
==> (/)
0.8908
1.1226/$
==> ($/)
115.69
129.87/$ / 1.1226/$

S0($/)
S1($/)

27

S0(/$)
S1(/$)

0.8909
0.8709

dollar appreciate/depreciate = (S0-S1)/S1 =

=(0.8909-0.8709)/0.8709=

Bid
1.716

2.30%
US$/S$

Ask
1.72

Chapter 7
S(SF/$)
29

1/1.72=

Bid
0.5814

Ask
0.5828

Forward premium of $ against SF = (F-S)/S

8.00% =((1.3-1.25)/1.25)*(360/180)
8% forward premium

1.25

F(SF/$)
1.3

days
180

S($/SF)
0.8

F($/SF)
0.7692307692

(S-F)/F
8.00%

S(SF/$)
1.25

F(SF/$)
1.3

days
180

S($/SF)
0.8

F($/SF)
0.7692307692

(F-S)/S
-7.69%

=((0.76923-0.8)/0.8)*(360/180)

($/pound)
pound/$

PPP-rate
1.43
0.69930

market rate
1.28
0.781250

(mkt - PPP)/PPP =(1.28-1.43)/1.43

(PPP - mkt)/mkt

Or

30
Or

31

=((0.8-0.76923)/0.76923)*(360/180)
Forward premium of SF against $ = (S-F)/F
-7.69% =((1.25-1.3)/1.3)*(360/180)
7.69% forward discount

e = - $ = -4% European terms

(CD)
4%
beg. rate ($/C$)
1
33-35

1.1225
1.1482

(S1-S0)/S0 = (1.1482-1.1225)/1.1225 =

S$/US$

28

32

D)
A)
C)
higher than B) 114.96

old /$
130
yen price

(US)
8%

(CD)- ($)
-4%
end rate
x

old $ price
150
19500

new /$
110

130 ==> 110

% increase of (130-110)/110
18.18%
18.18%
Answer to #33

degree of pass through =

US dollar is to depreciate by 4%.

C$ is to appreciate by 4%
(x-1)/1 = 4% ==>
new $ price
170

114.71

130==>114.71
(130-114.71)/114.71
13.33%
13.33%
73.33%

Answer to #35
13.33/18.18 = 73.33%

Answer to #35
13.33/18.18 = 73.33%

Answer to #33

36-37 Suppose that the annual interest rate is 5% in the US and 3.5% in Germany,
and that the spot exchange rate is $1.2/ and the forward exchange rate,
with one-year maturity, is $1.3/. Assume that an arbitrager
can borrow up to $2,000,000 and taking a covered interest arbitrage position.
1+ i$ = (F/S)(1 + i) S,F($/) American terms

US

Interest
5.00%

euro

3.50%

Borrow $
convert into using S
invest in to get
convert into $ using F
pay principal + interest in $
profit
39

S($/)
1.2

F($/)
1.25

1+ i$
1.05

1 + i$ = (S/F)(1 + i) S,F(/$) in European terms

S(/$)

F(/$)

0.8333

0.8000

2000000
1666666.67
1725000
2156250
2100000
56250

1 + i$
1.05

= 2000000/1.2
=1666667x1.035
= 1725500*1.25
=2000000x1.05
= 2156250-2100000

Answer to #36

Answer to #37

E(e) = i - i$ where S(/$) is in European terms

i()-i($) = 6%-8% = -2%

==> $ is expected to depreciate by 2%; is expected to appreciate.
40-41

Big Mac

300

$
2.5

BigMac FX rate(/$)
Market FX rate

Yen Under/Over Valuation (S(/$)) = (PPP-rate - Mkt rate)/ Mkt rate

Yen Under/Over Valuation (S($/)) = (Mkt rate - PPP-rate)/PPP-rate

Yen is undervalued by 7.69%.

42

43

44-45

e = - $ in European terms
(UK)
(US)
3%
5%

=(0.0076923-0.008333)/0.00833

(UK)-(US)
-2%

(Brazil)
(US)
(Brz)-(US)
15%
2%
13%
==> $ is expected to appreciate against real by 13%.
S1/S0 -1 = .13 ==> S1/2.7 -1 =.13 ==> S1 = 2.7x 1.13 =
S0(peso/$)

S1(peso/$)

3.4
loan amt in peso
68000000
=20000000*3.4

5.8

==> $ is expected to depreciate against by 2%.

S0(R/$)
2.7
3.05

borrow($)
int(US)
20000000
8%
amount to pay back
125280000 pesos
=20000000*(1.08)*5.8

(Mex)
12%
cost of debt
84.24%
=(125280000-68000000)/68000000

answer to #44

answer to #44

46

yen
5000000
borrow
convert into $
invest in $ to get
convert into
pay back loan
profit

int()
0.60%

duration(yr)
0.5
5000000
43478.26
44456.52
5023586.95652174
5015000
8586.96

int($)
4.50%

S(0)
115

=5000000/115
=43478.26*(1+0.045*0.5)
=44456.52*113
=5000000*(1+0.006*0.5)
=5023586.96-5015000

s - Dr. Park

=250*0.45
=112.5/10

0*(1-0.2)+179200
=819200/800000-1

= 50000-60000

of goods and services=-10000-2000

of current account
-2000-14000-1000

0)+(600-700) = 200 + (-100)

I + (T-G)=(1000-800)+(600-700)
0-800 = (X-M) + (G-T)=100+(700-600)

ficit (100),

.0016 = .7641

7544

0.7625-0.0012= .7613

08 - 0.6386 = 0.0022

S(SF/CD) = S(SF/$) / S(CD/$)

1.2030

g CD at 1.33.
1,600,000

SF

1391304.35 CD
1046093.49 $

1.7868

0.0230
1.7638

1225)/1.1225 =

2.3%

=1/1.716

(A)

of $ against SF = (F-S)/S

25)/1.25)*(360/180)

0.76923)*(360/180)

of SF against $ = (S-F)/F

1.3)/1.3)*(360/180)

0.8)*(360/180)

1.28-1.43)/1.43

over/under valued
-10.49%
-10.49%

reciate by 4%.
x=

1.04

Answer to #34
implied rate=19500/170

Answer to #35
13.33/18.18 = 73.33%

Answer to #35
13.33/18.18 = 73.33%

e position.

Answer to #38

F($/) American terms

(F/S)(1 + i)
1.07813

7.81%

F(/$) in European terms

(S/F)(1 + i)
1.0781
Answer to #36

Answer to #37

Answer to #40

300/2.5 =

-7.69%
-7.69%

S(/$)
120
130

=(120-130)/130

=(0.0076923-0.008333)/0.00833

epreciate against by 2%.

(US)
2%
Answer to #45

0000-68000000)/68000000

S($/)
0.00833333
0.00769231

S(1)
113