International Finance Seminar 1

1. Spot and 180-day forward exchange rates for several major currencies are as follows.

For each pair, calculate the annual percentage premium or discount(assume the dollar is the home currency). Spot Forward European Euro USD0.8000/Euro USD0.8160/Euro British Pound USD1.562/GBP USD1.5300/GBP Japanese Yen JPY120.00/USD JPY118.00/USD Swiss Franc SF1.6000/USD SF1.6200/USD
2. Say that you can buy and sell currencies through Bloomberg`s on line system at the

rate of S/ = 240, without incurring any transaction costs. Also suppose that another foreign exchange dealer is willing to trade at S/ = 200. What kind of transactions you will execute in order to make profit? 3. Suppose the following exchange rates are quoted Citibank: USD0.9045/Euro Barclays Bank: USD1.4443/GBP HSBC Bank: Euro1.6200/GBP Whats your strategy to make profit? What if, instead of Euro1.6200/GBP, the HSBC quotation is Euro1.5200/GBP? 4. a) Before the RMB exchange rage regime reform, the RMB had been pegged to $ at RMB 8.28/$. Many Chinese critics had urged China to revalue the yuan by 20% or more. What would the Chinese yuans value be in U.S. dollars if it had indeed been revalued by 20%? b) On July 21st 2005, the peoples bank of China announced the reform of the exchange rate regime, allowing the value of the yuan to rise to RMB8.11/$, and allowing the value of the yuan to fluctuate 0.3% /day over the previous days closing price going forward. If the Chinese yuan were to change by the maximum allowed per day, 0.3% against the U.S. dollar, consistently over a 30 or 60 day period, what values might it reach?
5. Suppose that one year ago the spot exchange rate between the Chilean peso and the

a)

b)
6.

US $ was S1Ps/$ = 500. Currently, S2Ps/$ = 625. During the same period prices in the US rose by 7% while prices in Chile rose by 22%. What should be the exchange rate today based on purchasing power parity? Is any of the two currencies overvalued or undervalued? Why?

Between 1982 and 2006, the JPY/$ exchange rate moved from JPY249.05/$ to JPY116.34, during this same 25-year period, the consumer price index (CPI) in Japan rose from 80.75 to 97.72 and the U.S. CPI rose from 56.06 to 117.07. a) If PPP had held over this period, what would the JPY/$ exchange rate have been in 2006? b) What happened to the real value of the yen in terms of dollars during this period?

Suppose that the U.S. price level initially $15,000/U.S. consumption bundle and the price level in Europe is initially 12,000/European consumption bundle. With the nominal exchange rate equal to $1.3/, what is the real exchange rate? Suppose that over the next year there is 4% inflation in the United States, there is 8% inflation in Europe, what is the nominal exchange rate if RPPP holds? What is the new real exchange rate?
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Discussion