A1:The most likely explanation for the rise of the U.S. dollar during the
early 1980s is that
a) the U.S. budget deficit raised U.S. interest rates
b) the U.S. trade deficit held down U.S.inflation
c) the U.S. economy improved dramatically. (5%)
A2:A nation that is running a savings deficit
a) must spend more than it produces
b) will invest domestically more than it saves
c) must have a net capital outflow. (5%)
A3:American terms refers to __________________.(5%)
A4:If the expected inflation rate is 5% and the real required return is 6%,
then the Fisher effect says that the nominal interest rate should be ___.
(5%)
A5:Suppose the pound sterling is selling for $1.62 and the buying rate for
the Swiss franc is $0.71. Then the pound/SFr cross rate is _____.(5%)
A6:Fluor Corporation has just made a French franc bid on a major project
located in France. It won't find out for 60 days whether it has won the
contract. The best way to protect against currency risk on its bid is for
Fluor to ____(buy or sell?) a franc ______(futures contract,call option or
put option?) (5% each)
A7:Suppose three-year deposit rates on Eurodollars and Euromarks are 10% and
5%,respectively. If the current spot rate for the mark is $0.50,then the
spot rate for the mark three years from now implied by these interest rates
is _____. (5%)
A8:In a freely floating exchange rate system,if the current account is running
a deficit,the balance of payments must _______(equal zero,run a surplus,or
run a deficit?) and the capital account must ______(equal zero,run a surplus
or run a deficit?) (5% each)
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Please show your calculations for B1~B4.
B1:Suppose the pound devalues from $1.25 at the start of the year to $1.00 at
the end of the year.Inflation during the year is 15% in England and 5% in
the U.S. What is the real devaluation (-) or real revaluation (+) of the
pound during the year? (10%)
B2:Suppose one observed the following direct spot quotations in New York and
London,respectively: 1.2500-60 and .8000-50. What is the arbitrage profit
per $1 million? (10%)
B3:The current 5-year Euroyen and Eurodollar rates are 8% and 12.5% per annnum,
respectively. What is the implied forward premium or discount of the yen
(over the current spot rate for a 5-year forward contract?) (10%)
B4:The 90-day interest rates(annualized)in the U.S. and Japan are,respectively,
10% and 7%,while the direct spot quote for the yen in New York is $.004300.
At what 90-day forward rate would interest rate parity hold? (5%)
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C1:Please explain what factors affect the determination of a foreign exchange
rate. (No more than 250 words) (10%)
C2:Please use a simple diagram to indicate the relationship between spot
exchange rate,nominal interest rate,expected inflation rate,and forward
exchange rate (no need to show the equations.) (5%)
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