国际金融答案

1 1 V Answers to End of Chapter Questions 1 Debits are reported as negative values while credits are reported as positive values Goods ServicesIncomeUnilateral Transfers Current Account a 1 000 1 000 B 20 000 20 000 c 1 000 000 1 000 000 d 100 100 2 Using the table provided above a The balance on goods and services is a deficit of 21 000 b The current account balance is a deficit of 1 020 900 c The capital account balance would be a surplus of 1 020 900 3 The balance on merchandise trade is the difference between exports of goods 719 and the imports of goods 1 145 for a deficit of 426 The balance on goods services and income is 719 279 284 1145 210 269 for a deficit of 342 Adding unilateral transfers to this gives a current account deficit of 391 342 49 391 Note that income receipts are credits and income payments are debits 4 Because the current account balance is a deficit of 391 then without a statistical discrepancy the capital account is a surplus of 391 In this problem however the statistical discrepancy is recorded as a positive amount credit of 11 Hence the sum of the debits in the balance of payments must exceed the credits by 11 So the deficit of the current account must be greater than the surplus on the capital account by 11 The capital account therefore is a surplus of 391 11 380 5 A balance of payments equilibrium see page 19 is when the debits and credits in the current account and the private capital account sum to zero In the problem above we do not know the private capital account balance We cannot say therefore whether this country is experiencing a balance of payments surplus or deficit or if it is in equilibrium 6 The current account is a deficit of 541 830 and the private capital account balance is a surplus of 369 068 The U S therefore has a balance of payments deficit 7 Positive aspects of being a net debtor include the possibility of financing domestic investment that is not possible through domestic savings thereby allowing for domestic capital stock growth which may allow job productivity and income growth Negative aspects include the fact that foreign savings may be used to finance domestic consumption rather than domestic savings which will compromise the growth suggested above Positive aspects of being a net creditor include the ownership of foreign assets which can represent an income flows to the crediting country Further the net creditor position also implies a net exporting position A negative aspect of being a net creditor includes the fact that foreign investment may substitute for domestic investment 8 A nation may desire to receive both portfolio and direct investment due to the type of investment each represents Portfolio investment is a financial investment while direct investment is dominated by the purchase of actual real productive assets To the extent that a country can benefit by each type of investment it will desire both types of investment Further portfolio investment tends to be short run in nature while FDI tends to be long run in nature This is also addressed in much greater detail in Chapter 7 2 9 Domestic Savings Domestic Investment Current Account Balance Domestic Savings Domestic Investment Net Capital Flows Therefore Current Account Balance Net Capital Flows 10 Using the equations above private savings of 5 percent of income government savings of 1 percent and investment expenditures of 10 percent would results in a current account deficit of 6 percent of income and a capital account surplus net capital inflows of 6 percent of income This could be corrected with a reduction in the government deficit to a surplus and or an increase in private savings 11 The transnationality index for World Films is 533 1233 227 615 322 1256 3 0 432 0 369 0 256 3 1 057 3 0 352 The transationality index for Music Publishers Worldwide is 455 2456 246 809 900 2467 3 0 185 0 304 0 365 3 0 854 3 0 285 Based on this index World films is the most globalized firm 2 V Answers to End of Chapter Questions 1 Because it costs fewer dollars to purchase a euro after the exchange rate change the euro depreciated relative to the dollar The rate of depreciation in absolute value was 1 2168 1 2201 1 2201 100 0 27 percent 2 If we take the inverse of each rate the formula provided in the questions becomes 1001001100 1 11 new newold new old old oldnew S SS S S S SS Returning to the table on page 37 the pound appreciation is 0 5511 0 5501 0 5501 100 0 18 which is the same value derived on page 39 3 Note that the rates provided are the foreign currency prices of the U S dollar Every value has been rounded to two decimal places which may cause some differences in answers A C Sfr Australia 2 351 061 121 53 Britain0 42 0 450 470 65 Canada0 952 23 1 061 45 Switzerland0 902 110 94 1 37 United States0 651 540 690 73 4 The cross rate is 1 702 1 234 1 379 which is smaller in value than that observed in the London market The arbitrageur would purchase 587 544 1 000 000 1 702 with the 1 million in the New York market Next they would use the 587 544 in London to purchase 837 250 587 544 1 425 Finally they would sell the 837 250 in the New York market for 1 033 167 837 250 1 234 The profit is 33 167 5 Total trade is 163 681 160 829 261 180 210 590 796 280 Trade with the Euro area is 163 681 261 180 424 861 Trade with Canada is 160 829 210 590 371 419 The weight assigned to the euro is 424 861 796 280 0 53 and the weight assigned to the Canadian dollar is 0 47 Recall the weights must sum to unity Because the base year is 2003 the 2003 EER is 100 The value of the 2004 EER is 3 0 82 0 88 0 53 1 56 1 59 0 47 100 0 4939 0 4611 100 95 4964 or 95 5 This represents a 4 5 percent depreciation of the U S dollar 6 The real effective exchange rate REER for 2003 is still 100 The real rates of exchange are for 2003 0 88 116 2 111 3 9187 1 59 116 2 111 7 1 6541 and for 2004 0 82 119 0 114 4 0 8530 1 56 119 0 115 6 1 6059 The value of the 2004 REER is 0 8530 0 9187 0 53 1 6059 1 6541 0 47 100 0 4921 0 4563 100 94 84 or 94 8 This represents a 5 2 percent depreciation of the U S dollar in real terms 7 This is a nominal appreciation of the euro relative to the U S dollar The percent change is 1 19 1 05 1 05 100 13 3 percent 8 The January 200 real exchange rate is 1 05 107 5 112 7 1 0016 The May 2004 real rate is 1 19 116 4 122 2 1 1335 9 In real terms the euro appreciated relative to the U S dollar The rate of appreciation is 1 1335 1 0016 1 0016 100 13 17 percent 10 Absolute PPP suggests the May 2004 exchange rate should be 122 2 116 4 1 0498 The actual exchange rate is 1 19 Hence the euro is overvalued relative to the U S dollar by 1 19 1 0498 1 0498 100 13 35 percent 11 Relative PPP can be used to calculate a predicted value of the exchange rate as SPPP 1 05 122 2 112 7 116 4 107 5 1 0014 12 The actual exchange rate is 1 19 Hence the euro is overvalued relative to the U S dollar by 1 19 1 0014 1 0014 100 18 83 percent 3 V Answers to End of Chapter Questions 1 Ranking the various exchange rate arrangements by flexibility is not so clear cut Nonetheless the arrangements described in this chapter are from fixed to flexible dollarization currency board commodity standard peg dollar standard peg currency basket peg crawling peg managed float flexible 2 The two primary functions of the International Monetary Fund are surveillance of member nations macroeconomic policies and to provide liquidity to member nations experiencing payments imbalances 3 The value of the Canadian dollar relative to gold is CAN 69 1 38 50 and the value of the British pound relative to gold is 33 33 50 1 50 4 The exchange rate between the Canadian dollar and the British pound is C 2 07 1 38 1 50 5 The currency value of the peso can be expressed as 0 50 50 P1 The exchange rate between the dollar and the euro can be used to convert the euro amount to its dollar equivalent of 0 55 Hence 1 05 P1 or and exchange value of 0 952 P Using the exchange rate between the dollar and the euro again the exchange rate between the peso and the euro is 0 1 048 P 0 952 P 1 10 6 Because 1 05 is the currency content of the basket as shown above and 0 50 of that content is attributable to the dollar the weight assigned to the dollar is 0 50 1 05 0 476 or 47 6 percent Because the weights must sum to unity the weight assigned to the euro is 52 4 percent 7 The main difference between the two systems was that in the Smithsonian system the dollar was not pegged to the value of gold One reason that the system was short was because there was little confidence that U S economic policy would be conducted in a manner conducive to a system of pegged exchange rates 4 8 The principle responsibilities of a currency board are to issue domestic currency notes and peg the value of the domestic currency A currency board is not allowed to purchase domestic debt act as a lender of last resort or set reserve requirements 9 The Lourve accord established unofficial limits on currency value movements In a sense it was peg with bands for each of the main currencies dollar yen and mark 10 Differences in the fundamental determinants of currency values between the pegging country and the other country should be considered To this point of the text the rate of inflation is a good example Relative PPP can be used to determine the rate of crawl 11 Under a currency board system a nation still maintains its domestic currency Hence policymakers can change exchange rate policies and monetary policies if they so desire When a nation dollarizes and disposes of its domestic currency it no longer has this option 4 V Answers to End of Chapter Questions 1 Given that the exchange rate is expressed as dollars to euros we treat the dollar as the domestic currency Note also that interest rates are quoted on an annual basis even though the maturity period is only one month In this problem we divide the interest rates by 12 to put them on a one month basis a The interest rate differential therefore is 1 75 12 3 25 12 0 125 The forward premium discount expressed as a percentage is calculated as F S S 100 1 089 1 072 1 072 100 1 5858 R R 450 F S S 0 125 1 5858 1 00 1 00 b Transaction costs are shown in the figure above by the dashed lines that interest the horizontal axis at values of 1 00 and 1 00 5 c The positive value indicates that the euro is selling at a premium In addition the interest rate differential favors the euro denominated instrument Hence a saver shift funds to euro denominated instruments 2 Using the provided information 1 75 12 3 25 12 1 089 1 072 1 072 100 0 125 1 04250 1 4575 1 5245 0 9967 an arbitrage opportunity exists in this example if one were to borrow the pound and lend the euro Suppose you were to borrow one pound the steps are then a Borrow 1 convert to 1 5245 on the spot market b Lend euros yielding 1 5245 1 03125 1 5721 c See euros forward yielding 1 5721 1 4575 1 0787 d Repay the pound loan at 1 1 04250 1 04250 e The profit is 0 0362 or 3 62 percent 5 Because interest rates are quoted as annualized rates we need to divide each interest rate by 4 12 3 The uncovered interest parity equation is R R Se 1 S S a Rewriting the equation for the expected future expected exchange rate yields Se 1 R R 1 S b Using the values given yields the expected future spot rate Se 1 0 0124 4 0 0366 4 1 1 5245 1 5153 6 Given this information we can calculate the forward premium discount with the UIP condition F S S R R The interest differential is 1 75 3 25 1 5 This is the expected forward premium on the euro Hence F 1 08 1 08 0 015 implies that F 1 0962 7 We can adjust for the shorter maturity by dividing the interest rates by 2 12 6 Now the interest differential is 0 75 still a forward premium on the euro The forward rate now is F 1 08 1 08 0 0075 implies that F 1 0881 8 The U S real rate is 1 24 2 1 0 86 and the Canadian real rate is 2 15 2 6 0 45 Ignoring transaction costs because the real interest rates are not equal real interest parity does not hold 9 Uncovered interest parity is R R Se 1 S S a Using the same process as in question 5 above the expected future spot rate is Se 1 R R 1 S Se 1 0 075 0 035 1 30 35 31 564 b Using the same process as in question 5 above the expected future spot rate is Se 1 R R 1 S Se 1 0 075 0 035 1 0 02 30 35 30 957 Q0Q1Q0Q1 7 10 Because the forward rate 30 01 is less than the expected future spot rate 30 957 you should sell the koruna forward For example 1 would purcase k30 957 which you could sell forward yielding k30 957 30 01 1 0316 11 International financial instruments a Global Bond long term instruments issued in the domestic currency b Eurobond term is longer than one year and is issued in a foreign currency c Eurocurrency keyword is that it is a deposit d Global equity keyword is that it is a share 5 V Answers to End of Chapter Questions 1 Given that PB C 1 R C 1 R 2 C 1 R 3 C 1 R 4 multiply each side by 1 R PB 1 R C C 1 R C 1 R 2 and subtract PB from each side PB 1 R PB C C 1 R C 1 R 2 C 1 R C 1 R 2 Simplifying PB R C Therefore PB C R 2 In this situation annual yields decline as the term to maturity increases which means that the yield curve slopes downward According to the expectations theory of the term structure of interest rates this situation arises because bond market traders anticipates that short term interest rates will fall sharply Thus an average of current and future short term rates which when added to any term premium applicable to a longer maturity is lower than the current short term rate 3 Yes the excess return on the German government bond equals 3 5 percent 5 percent 3 percent 1 5 percent 4 Parity Conditions a Using uncovered interest parity R R S 1e S S Because the left hand side is negative we would expect the right hand side to be negative indicating a domestic currency appreciation b Using relative PPP S Because the left hand side is negative we would expect the right hand side to be negative indicating a domestic currency appreciation 5 The domestic real interest rate is 5 percent less 2 percent or 3 percent The foreign real interest rate is 6 percent less 4 percent or 2 percent Real interest rates are not equal so the real interest parity condition does not hold We would expect funds to flow into the domestic country and out of the foreign country which would drive the domestic real interest rate down and the foreign real interest rate up 6 In contrast to forward currency contracts currency futures require delivery of standard quantities of currencies In addition holders of currency futures experience profits of losses on the contracts during the entire period before the contracts expire whereas profits or losses occur only at the expiration date of a forward currency contract 7 A currency future already is a derivative because its value varies with the exchange rate The value of a currency futures option in turn depends on the underlying value of a currency futures contract so its value is derived from the futures derivative In this way a currency futures option is a derivative of a derivative 8 a The company owes 500 000 Sfr and is concerned about the future spot exchange value of the U S dollar Swiss franc It can therefore purchase future contracts to set a limit to its potential exchange rate losses 8 b The Sfr is purchased in 125 000 franc increments Therefore the firm would want to purchase 500 000 125 000 4 futures contracts Given the initial margin on a franc contract the total initial margin the firm establishes is 4 1 688 6 752 The daily margin changes are as follows First 0 6252 0 6251 125 000 4 50 Therefore its margin equals 6 802 Second 0 6127 0 6252 125 000 4 6250 Therefore the margin would fall to 552 However the maintenance margin is equal to 1 250 Thus the margin will equal 1 250 Third 0 6115 0 6127 125 000 4 600 Again the margin must remain at 1 250 Fourth 0 6806 0 6115 125 000 4 1450 Again this daily change would fall beneath the maintenance margin Thus it remains at 1 250 c As the dollar continues to appreciate relative to the Swiss franc the value of the futures contract falls However the cost of 500 000 franc payment is becoming cheaper on terms of the U S dollar 9 a The call option is currently out of the money b 0 0188 62 500 1 175 1 175 8 contracts 9 400 c At S 0 96 the option is not exercised and the firm is out 9 400 At S 1 02 the option is exercised The firm earns 10 600 At S 0 9657 the firm does not exercise the option and is out 9 400 d Break even 0 9988 e See Diagram given in part b 10 600 9 400 Net Profit Net Loss 0 Out of the money At the money In the money Break Even 0 9800 9988 1 02 0 960 9 10 The pros and cons of forward contracts and swaps lie within how each works A forward contract can be arranged between a purchaser and a seller and is dependent upon each participant s beliefs of what will happen in the future Sometimes it can be difficult to match counterparties to such contracts Swaps on the other hand directly match traders who require flows of currencies held by one another Swaps may also allow borrowers to receive better loan rates by issuing debt in their home currency rather than in a foreign currency thereby potentially avoiding a risk premium Considerations of the reason for the long position on a currency and which currency is at issue will influence the decision of which derivative to use 6 V Answers to End of Chapter Questions 1 A key reason that an individual might hold a deposit with a bank that lends internationally instead of making international loans directly is the problem of asymmetric information or the fact that potential international borrowers know more about their own prospects than the individual does To avoid risks of loss arising from the adverse selection problem or the likelihood that potential borrowers with high risk projects will desire credit the individual would have to screen international loan applicants carefully Yet this could be difficult to do across national boundaries In addition if the individual were to exte