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國際金融課后習題答案

Youaregiventhefollowinginformationaboutacountry’sinternationaltransactionsduringayear:a.Calculatethevaluesofthecountry’sgoodsandservicesbalance,currentaccountbalance,andofficialsettlementsbalance?

a.Merchandisetradebalance:$330-198=$132

Goodsandservicesbalance:$330-198+196-204=$124Currentaccountbalance:$330-198+196-204+3-8=$119

Officialsettlementsbalance:$330-198+196-204+3-8+102-

202+4=$23

b.Whatarethevalueofthechangeinofficialreserveassets(net)?Isthecountryincreasingordecreasingitsnetholdingsofofficialreserveassets?

b.Changeinofficialreserveassets(net)=-officialsettlementsbalance=-$23Thecountryisincreasingitsnetholdingsofofficialreserveassets.

Whatarethemajortypesoftransactionsoractivitiesthatresultinsupplyofforeigncurrencyinthespctforeignexchangemarket?

Exportsofmerchandiseandservicesresultinsupplyofforeigncurrencyintheforeignexchangemarket.Domesticsellersoftenwanttobepaidusingdomesticcurrency,whiletheforeignbuyerswanttopayintheircurrency.Intheprocessofpayingfortheseexports,foreigncurrencyisexchangedfordomesticcurrency,creatingsupplyofforeigncurrency.Internationalcapitalinflowsresultinasupplyofforeigncurrencyintheforeignexchangemarket.Inmakinginvestmentsindomesticfinancialassets,foreigninvestorsoftenstartwithforeigncurrencyandmustexchangeitfordomesticcurrencybeforetheycanbuythedomesticassets.

Theexchangecreatesasupplyofforeigncurrency.Salesofforeign

financialassetsthatthecountry'sresidentshadpreviouslyacquired,andborrowingfromforeignersbythiscountry'sresidentsareotherformsofcapitalinflowthatcancreatesupplyofforeigncurrency.

Youstratwithdollarsandwanttoendupwithdollars

a.hoewouldyouengageinarbitragetoprofitfromthesethreerates?whatistheprofitforeachdollarusedinitially?a.Thecrossratebetweentheyenandthekroneistoohigh(theyenvalueofthekroneistoohigh)relativetothedollar-foreigncurrencyexchangerates.Thus,inaprofitable

triangulararbitrage,youwanttosellkroneratthehighcrossrate.

Thearbitragewillbe:Usedollarstobuykronerat$0.20/krone,usethesekronertobuyyenat25yen/krone,andusetheyentobuydollarsat

$0.01/yen.Foreachdollarthatyousellinitially,youcanobtain5kroner,these5kronercanobtain125yen,andthe125yencanobtain$1.25.Thearbitrageprofitforeachdollaristherefore25cents.

b.Asaresultofthisarbitrage,whatisthepressureonthecross-ratebetweenyenandkrone?whatmustthevalueofthecross-ratebetoeliminatetheopportunityfortriangulararbitrage?

b.Sellingkronertobuyyenputsdownwardpressureonthecrossrate(theyenpriceofkrone).Thevalueofthecrossratemustfallto20(=0.20/0.01)yen/kronetoeliminatetheopportunityfortriangulararbitrage,assumingthatthedollarexchangeratesareunchanged.

Explainthenatureoftheexchangerateriskforeachofthefollowing,fromtheperspectiveoftheU.Sfrimorperson.inyouranswer,includewhethereachisalongorshortpositioninforeigncurrency.

a.asmallU.Sfirmsoldexperimentalcomputercomputercompomentsto

aJapanesefirm,anditwillreceivepaymentof1millionyenin60days.

a.TheU.S.firmhasanassetpositioninyen—ithasalongpositioninyen.Tohedgeitsexposuretoexchangeraterisk,thefirmshouldenterintoaforwardexchangecontractnowinwhichthefirmcommitstosellyenandreceivedollarsatthecurrentforwardrate.Thecontractamountsaretosell1millionyenandreceive$9,000,bothin60days.

Thecurrentspotexchangerateis＄1.20/euro.thecurrent90-dayforwardexchangerateis＄1.18/euro.youexpectthespotratetobe

＄1.22/euroin90days.howwouldyouspeculateusingaforwardcontract?ifmanypeoplespeculateinthisway,whatpressureisplacedonthewalueofthecurrentforwardexchangerate?

Relativetoyourexpectedspotvalueoftheeuroin90days($1.22/euro),thecurrentforwardrateoftheeuro($1.18/euro)islow—

Annualizedinterestrateon30-daydollar-denominatedbonds:12%(1.0%for30days)Annualizedinterestrateon30-daySwissfranc-denominatedbonds:6%(0.5%for30days)a.Istheswissfrancataforwardpremiumordiscount?

a.TheSwissfrancisataforwardpremium.Itscurrentforwardvalue($0.505/SFr)isgreaterthanitscurrentspotvalue($0.500/SFr).

b.shouldaU.S-basedinvestormakeacoveredinvestmentinswissfranc-denominated30-daybonds,ratherthaninvesting30-day

dollar-denominatedbonds?Explain.

b.Thecoveredinterestdifferential\?(0.505)/0.500)-(1+0.01)=

0.005.(Notethattheinterestrateusedmustmatchthetimeperiodoftheinvestment.)Thereisacoveredinterestdifferentialof0.5%for30days(6percentatanannualrate).TheU.S.investorcanmakeahigherreturn,coveredagainstexchangeraterisk,byinvestingin

SFr-denominatedbonds,sopresumablytheinvestorshouldmakethiscoveredinvestment.AlthoughtheinterestrateonSFr-denominatedbondsislowerthantheinterestrateondollar-denominatedbonds,theforward

premiumonthefrancislargerthanthisdifference,sothatthecoveredinvestmentisagoodidea.

c.Becauseofcoveredinterestarbitrage,whatpressuresareplacedonthevariousrates?iftheonlyratethatactuallychangesisforwardexchangerate,towhatvaluewillitbudriven?

c.Thelackofdemandfordollar-denominatedbonds(orthesupplyofthesebondsasinvestorsselltheminordertoshiftintoSFr-denominatedbonds)putsdownwardpressureonthepricesofU.S.bonds—upwardpressureonU.S.interestrates.Theextrademandforthefrancinthespotexchangemarket(asinvestorsbuySFrinordertobuySFr-denominatedbonds)putsupwardpressureonthespotexchangerate.Theextrademandfor

SFr-denominatedbondsputsupwardpressureonthepricesofSwissbonds

—downwardpressureonSwissinterestrates.Theextrasupplyoffrancsintheforwardmarket(asU.S.investorscovertheirSFrinvestmentsbackintodollars)putsdownwardpressureontheforwardexchangerate.Iftheonlyratethatchangesistheforwardexchangerate,thisratemustfalltoabout$0.5025/SFr.Withthisforwardrateandtheotherinitialrates,thecoveredinterestdifferentialisclosetozero.

Whyistestingwhetheruncoveredinterestparityholdsforactualratesmoredifficultthantestingwhethercoveredinterestparityholds?

Intestingcoveredinterestparity,alloftheinterestratesandexchangeratesthatare

neededtocalculatethecoveredinterestdifferentialareratesthatcanobservedinthebondandforeignexchangemarkets.Determiningwhetherthecoveredinterestdifferentialisaboutzero(coveredinterestparity)isthenstraightforward(althoughsomemoresubtleissuesregardingtimingoftransactionsmayalsoneedtobeaddressed).Inordertotestuncoveredinterestparity,weneedtoknownotonlythreerates—two

interestratesandthecurrentspotexchangerat—ethatcanbeobserved

inthemarket,butalsoonerate—theexpectedfuturespotexchangerate

—thatisnotobservedinanymarket.Thetesterthenneedsawaytofindoutaboutinvestors'expectations.Onewayistoaskthem,usingasurvey,buttheymaynotsayexactlywhattheyreallythink.Anotherwayistoexaminetheactualuncoveredinterestdifferentialafterweknowwhatthefuturespotexchangerateactuallyturnsouttobe,andseewhetherthestatisticalcharacteristicsoftheactualuncovereddifferentialareconsistentwithanexpecteduncovereddifferentialofaboutzero(uncoveredinterestparity)

Annualinterestrateon180-dayeuro-denominatedbonds:3%Annualinterestrateon180-dayU.Sdollar-denominatedbonds:4%Ibvestorscurrentlyexpectthespotexchangeratetobeabout

＄1.005/euroin180days.a.showthatuncoveredinterestparityholds(approximately)attheserates

a.Theeuroisexpectedtoappreciateatanannualrateofapproximately((1.005-1.000)/1.000)?(360/180)?100=1%.Theexpecteduncoveredinterestdifferentialisapproximately3%+1%-4%=0,souncoveredinterestparityholds(approximately).

Whatislikelytobetheeffectonthespoteschangerateiftheinterestrateon180-daydollar-denominatedbondsdeclinesto3%?Iftheeurointerestrateandtheexpectedfuturespotrateareunchanged,andifuncoveredinterestparityisreestablished,whatwillthenewcurrentspotexchangeratebe?hasthedollarappreciatedordepreciated?b.Iftheinterestrateon180-daydollar-denominatedbondsdeclinesto3%,then

thespotexchangerateislikelytoincreas—etheeurowillappreciate,

thedollardepreciate.Attheinitialcurrentspotexchangerate,theinitialexpectedfuturespotexchangerate,andtheinitialeurointerestrate,theexpecteduncoveredinterestdifferentialshiftsinfavorofinvestingineuro-denominatedbonds(theexpecteduncovereddifferential

isnowpositive,3%+1%-3%=1%,favoringuncoveredinvestmentineuro-denominatedbonds.Theincreaseddemandforeurosinthespotexchangemarkettendstoappreciatetheeuro.If

theeurointerestrateandtheexpectedfuturespotexchangerateremainunchanged,thenthecurrentspotratemustchangeimmediatelytobe

$1.005/euro,toreestablishuncoveredinterestparity.Whenthecurrentspotratejumpstothisvalue,theeuro'sexchangeratevalueisnotexpectedtochangeinvaluesubsequentlyduringthenext180days.Thedollarhasdepreciatedimmediately,andtheuncovereddifferentialthenagainiszero(3%+0%-3%=0)

Annualinterestrateon90-dayU.Sdollar-denominatedbonds:4%Annualinterestrateon90-dayyen-denominatedbonds:4%

b.Ifinvestorsexpectthattheexchangeratewillbe$0.0095/yen,thentheyexpecttheyentodepreciatefromitsinitialspotvalueduringthenext90days.Giventheotherrates,investorstendtoshifttheirinvestmentstowarddollar-denominatedinvestments.Theextrasupplyofyen(anddemandfordollars)inthespotexchangemarketresultsinadecreaseinthecurrentspotvalueoftheyen(thedollarappreciates).

Theshiftto

expectingthattheyenwilldepreciate(thedollarappreciate)sometimeduringthenext90daystendstocausetheyentodepreciate(thedollartoappreciate)immediatelyinthecurrentspotmarket.

Toaidinitseffortstogetreelected,thecurrentgovernmentofocountrydecidestoincreasethegrowthrateofthedomesticmoneysupplybytwopercentagepoints.theincreasedgrowthratebecomes〞permanene〞becauseoncestarteditisdifficulttoreverse.

a.accordingtothemonetaryapproach,howwillthisaffectthelong-runtrendfortheexchangeratevalueofthecountry’scurrency?

a.Becausethegrowthrateofthedomesticmoneysupply(Ms)istwopercentagepointshigherthanitwaspreviously,themonetaryapproachindicatesthattheexchangeratevalue(e)oftheforeigncurrencywillbehigherthanitotherwisewouldbe—thatis,theexchangeratevalueofthecountry'scurrencywillbelower.Specifically,theforeigncurrencywillappreciatebytwopercentagepointsmoreperyear,ordepreciatebytwopercentagepointsless.Thatis,thedomesticcurrencywilldepreciatebytwopercentagepointsmoreperyear,orappreciatebytwopercentagepointsless.

b.explainwhythenominalexchangeratetrendisaffected,referringtoPPP

b.Thefastergrowthofthecountry'smoneysupplyeventuallyleadstoafasterrateofinflationofthedomesticpricelevel(P).Specifically,theinflationratewillbetwo

percentagepointshigherthanitotherwisewouldbe.AccordingtorelativePPP,afasterrateofincreaseinthedomesticpricelevel(P)leadstoahigherrat