Problem 6.1 Pulau Penang Penang Island Resort Resort Theresa /unn is planning pl anning a 30-day vacation on *ulau *enang1 "alaysia1 one year from now. The present charge for a luxury l uxury suite plus meals in "alaysian ringgit #$"% is $"+1000(day. $"+1000(day. The "alaysian ringgit presently trades at $"2.2()B*. &he determines that the pound cost today for a 30-day stay would be about )B*41000. The hotel informs her that any increase in its room charges will be limited to an increase in the "alaysian cost of living. "alaysian inflation is expected to be 35 per annum1 while 6.7. inflation is expected to be +5.
a. How many pounds might Theresa expect expect to need one year hence to pay for her 30-day vacation? vacation? b. By what percent percent will the pound cost have gone gone up? hy? Assumptions !harge for suite plus meals in "alaysian ringgit #$"% &pot exchange rate #"'$()B*% )B* cost today for a 30 day stay
"alaysian ringgit inflation rate expected to be )B* inflation rate expected to be
Value 1,000.00 5.2522 $5,711.8 !.000" 1.000"
a. #eresa migt e%pe&t to need need one 'ear en&e to pa' (or er !0)da' *a&ation in +P
&pot exchange rate #ringgit per )B*% "alaysian ringgit inflation rate expected to be )B* inflation rate expected to be
5.2522 !.000" 1.000"
&pot #expected #expected in + year% , &pot x # + $" inflation% inflation% ( # + )B* inflation% -%pe&ted spot rate one 'ear (rom no based on PPP /R$
5.!56203
-%pe&t -%pe&ted ed otel otel &arge &argess to be paid one 'ear 'ear (rom (rom no (or a !0)da' !0)da' sta' sta' in 4R 4R
!0,00 !0,00.00 .00
)B* needed on the basis of these two expectations
$5,76.01
b. Per&ept &ange in +P &ost
/ew dollar cost riginal dollar cost Per&ent &ange in $ &ost
$5,76.01 $5,711.8 1.000"
The )B* cost has risen by the 67 inflation rate. This is a result of your estimation of the future )B* costs and the exchange rate changing in proportion to inf lation #relative purchasing power parity%.
Problem 6.2 Argentin Argentinee #ears The 9rgentine 9rgentine peso was fixed through a currency board at *s+.00(; throughout the +<<0s. >n 8anuary 00 the 9rgentine 9rgentine peso was floated. n 8anuary <1 003 it was trading at *s3.0(;. uring that one year period 9rgentina@s 9rgentina@s inflation rate was 05 on an annuali:ed basis. >nflation in the 6nited &tates during that same period was .5 annuali:ed. a. hat should have been the exchange rate in 8anuary 003 if *** held? b. By what percentage percentage was the 9rgentine peso undervalued undervalued on an annuali:ed basis? basis? c. hat were the probable causes causes of undervaluation? Assumptions &pot exchange rate1 fixed peg1 peg1 early 8anuary 00 #*s(;% &pot exchange rate1 8anuary <1 003 #*s(;% 6& inflation for year #per annum% 9rgentine inflation for year #per annum%
Value 1.0000 !.2000 2.20" 20.00"
a. at sould a*e been te e%&ange rate in anuar' 200! i( PPP eld9
Beginning spot rate #*s(;% 9rgentine inflation 6& inflation *** exchange rate
1.00 20.00" 2.20" 1.17
b. ' at per&entage as te Argentine peso under*alued on an annuli:ed basis9
9ctual exchange rate #*s(;% *** exchange rate #*s(;% *ercentage overvaluation #positive% or undervaluation #negative%
&. at ere te probable &auses o( under*aluation9 under*aluation9
The rapid decline in the value of the 9rgentine peso was was a result of not only inflation1 but also also a severe crisis in the balance balance of payments payments #see #see !hapter !hapter =%.
!.20 1.17 )6!.!07"
Problem 6.! apanesenited tates Parit' ;onditions illiam Feon is attempting to determine whether 8apanese and 9ustralian 9ustralian financial conditions are at parity. The current spot rate is a flat +0E.33(9;1 while the one-year forward rate is +04.20(9;. Aorecast inflation is 2.005 for 8apan and 4.E05 for the 9ustralia. The one-year 8apanese yen deposit rate is G.E251 and the one-year 9ustralian dollar deposit rate is <.G05. a. iagram and calculate whether international parity conditions hold between 8apan and 9ustralia. b. Aind the forecasted forecasted change in the 8apanese yen(9ustralian yen(9ustralian dollar #(9;% exchange rate rate one year year from now. now. Assumptions Aorecast annual rate of inflation for 8apan Aorecast annual rate of inflation for 9ustralia ne-year ne-year interest rate for 8apan ne-year ne-year interest rate for 9ustralia &pot exchange rate #(9;% ne-year forward exchange rate #(9;%
Value 5.000" 6.800" 7.850" .700" 108.!! 106.50
a. Appro%imate
Forward rate as an unbaised
C
C
predictor (E)
D D D D
C
parity (A)
D D D D
D D D D D
International
1.7" /apanese 'en at a premium
C
)1.8" /Australia iger tan apan
Fisher Effect (C)
D D D D
D D D Interest rate parity (D)
C
C
>i((eren&e in nominal interest rates )1." /iger in Australia
Purchasing power
D D C
C
Fisher effect (B)
9s is the always the case with parity conditions1 the future spot rate is i mplicitly forecast forecast to be eual to the forward rate1 the implied rate from the internationa l Aisher effect1 and the rate implied by purchasing power parity. 9ccording to the calculations1 the marIets are indeed in euilibrium -- parity -- and the future spot rate is proJected to be 8*'+04.20(96..
b. &pot exchange rate #(9;% ne-year forward exchange rate #(9;% Aorcasted change in exchange rates
+0E.33 +04.20 1.7"
(Current Spot Rate - Forward Exchange Rate) / (Forward Exchange Rate)
Problem 6.3 'dne' to Poeni% Terry Terry Famoreaux has homes in both &ydney1 &ydney1 9ustralia and *hoenix1 6nited &t ates. He travels between the two cities at least twice a year. Because of his freuent freuent trips he wants to buy some new1 high uality luggage. He@s done his research and has decided to go with a Briggs K $iley brand three-piece luggage set. There are retails stores in both *hoenix and &ydney. Terry was a finance maJor and wants to use purchasing power parity to determine if he is paying the same price no matter where he maIes his purcahse. a. >f the price of the 3-piece luggage set in *hoenix is ;E20 and the price of the same 3-piece set in &ydney is ;<301 using purchasing power parity1 is the price of the luggage truly eual if the th e spot rate is 9;+.0<=+(;? b. >f the price of the luggage luggage remains the same in *hoenix one year from from now1 determine what the price of the luggage should should be in &ydney in one-year one-year time if *** holds true. The 6& >nflation rate is +.+25 and the 9ustralian inflation rate is 3.+35. Assumptions *rice of 3-*iece Fuggage set in 6&; *rice of 3-*iece Fuggage set in 9; &pot exchange rate1 #9;(;% 6& inflation for year #per annum% 9ustralian inflation for year #per annum%
Value 850.00 !0.00 1.031 1.15" !.1!"
a. Is te spot rate a&&urate gi*en bot luggage pri&es9
*rice of 3-*iece Fuggage set in 6&; *rice of 3-*iece Fuggage set in 9; &pot rate as determined by *** Spot rate = Price in A$ / Price in US$
E20.00 <30.00 1.031
b. at sould be te pri&e o( te luggage set in A$ in 1)'ear i( PPP olds9
Beginning spot rate #9;(;% 9ustralian inflation 6& inflation *** exchange rate *rice of 3-*iece Fuggage set in 6&; *** exchange rate *rice of 3-piece luggage set in &ydney #9;%
+.0<=+ 3.+35 +.+25 1.1155
E20.00 +.++22 38.1
Howeer! Howeer! purcha"ing power parit# i" not awa#" an accurate accurate predictor predictor o% exchange exchange rate &oe&ent"! particuar# in the "hort-ter&'
Problem 6.5 tarbu&=s in ;roatia &tarbucIs opened its first store in Lagreb1 Lagreb1 !roatia in ctober 0+0. The price of a tall vanilla latte in Lagreb is 2.G0In. >n /ew 'orI 'orI !ity1 !ity1 the price of a tall vanilla latte is ;.42. The exchange rate bewteen !roatian Iunas #In% and 6.&. dollars is In2.4EE(;. 9ccording to purchasing purchasing power parity1 is the !roatian Iuna overvalued or undervalued? undervalued? Assumptions &pot exchange exchange rate #7n(;% *rice of vanilla latter in Lagreb #In% *rice of vanilla latter in /'! #;%
9ctual price of !roatian latte in 6& >mplied *** of !roatian latte in 6& *ercentage overvaluation #positive% or undervaluation #negative%
Value 5.6288 25.70 2.65
3.57 .70 112.308"
Problem 6.6 ;orolla -%ports and Pass)#roug 9ssume that the export price of a Toyota Toyota !orolla from saIa1 8apan is 1+201000. The exchange rate is EG.40(;. The forecast rate of inflation in the 6nited &tates is .5 per year and is 0.05 per year in 8apan. 6se this t his data to answer the following uestions on exchange rate pass through. a. hat was the export price for the !orolla at the beginning of the year expressed in 6.&. dollars? b. 9ssuming 9ssuming purchasing power power parity holds1 what should the exchange rate be at at the end of the year? year? c. 9ssuming +005 pass-through of exchange rate1 what will the dollar price of a !orolla be at the end of the year? d. 9ssuming G25 pass-through1 what will the dollar price of a !orolla be at the end of the year? teps >nitial spot exchange rate #(;% >nitial price of a Toyota !orolla #% Mxpected 6& dollar inflation rate for the coming year Mxpected 8apanese yen inflation rate for the coming year esired rate of pass through by Toyota a. at as te e%port pri&e (or te ;orolla at te beginning o( te 'ear9 'ear-beginning price of an !orolla #% &pot exchange rate #(;% 'ear-beginning price of a !orolla #;% b. at is te e%pe&ted spot rate at te end o( te 'ear assuming PPP9 >nitial spot rate #(;% Mxpected 6&; inflation Mxpected 8apanese yen inflation Mxpected spot rate at end of year assuming *** #(;% &. Assuming &omplete pass troug, at ill te pri&e be in $ in one 'ear9 *rice of !orolla at beginning of year #% 8apanese yen inflation over the year *rice of !orolla at end of year #% Mxpected spot rate one year from now assuming *** #(;% *rice of !orolla at end of year in #;% d. Assuming partial pass troug, at ill te pri&e be in $ in one 'ear9 *rice of !orolla at end of year #% 9mount of expected exchange rate change1 in percent #from * **% *roportion of exchange rate change passed through by Toyota *roportional percentage change Mffective exchange rate used used by Toyota Toyota to price in 6&; for end of year year *rice of Toyota at end of year #;%
$
$
$
Value 87.60 2,150,000 2.200" 0.000" 75.000"
2,150,000 87.60 23,53!.!8
87.60 2.20" 0.00" 85.71
2,150,000 0.000" 2,150,000 85.71 25,08!.!!
2,150,000 2.200" 75.000" 1.650" 86.178 23,38.!3
Problem 6.7 #a=esi ?amada )) ;IA apan /A TaIeshi 7amada1 a foreign exchange trader at !redit &uisse #ToIyo%1 is exploring covered interest arbitrage possibilities. He wants to invest i nvest ;210001000 or i ts yen euivalent1 in a covered interest arbitrage between 6.&. dollars and 8apanese yen. He faced the following exchange rate and interest rate uotes. Assumptions Arbitrage (unds a*ailable pot rate /$ 180)da' (orard rate /$ 180)da' .. dollar interest rate 180)da' apanese 'en interest rate
Value $5,000,000 118.60 117.80 3.800" !.300"
4en -@ui*alent 5!,000,000
Aritrage Rue o% hu&* +% the di%%erence di%%erence in intere"t rate" i" greater than than the %orward pre&iu&/di"count! pre&iu&/di"count! or expected change in the "pot rate %or U+A! ine"t in the higher intere"t #ieding currenc#' currenc#' +% the di%%erence in intere"t rate" i" e"" than the %orward pre&iu& (or expected change in the "pot r ate)! ine"t in the ower #ieding currenc#'
>i((eren&e in interest rates / i ) i $
)1.300" 1.!58" )0.032"
This tells TaIeshi 7amada that he should borrow yen and invest in the higher yielding currency1 the 6.&. dollar1 to locI-in a covered interest arbitrage #!>9% profit.
U! dollar interest rate ("#$ days) 3.800"
$
5,000,000
N
N
1.0230
N
N
B B B B B pot /$ 118.60 B B B 5!,000,000.00 apanese 'en #AR#
$
5,120,000 C C
)))))))))))))))D 18 180 da's ))))))))))))))))D
N
N
1.0170
N
!.300" %apanese yen inte rest rate ("#$ days)
N
C C C
TaIeshi TaIeshi 7amada generates a !>9 profit by investing in the higher interest rate currency1 the dollar1 and simultaneously selling the dollar proceeds forward into yen at a forward premium which does not completely negate the interest differential.
Problem 6.8 #a=esi ?amada )) IA apan / TaIeshi TaIeshi 7amada1 !redit &uisse #ToIyo%1 #ToIyo%1 observes that the (; spot rate has been holding steady1 and both dollar and yen interest rates have remained relatively fixed over the past weeI. TaIeshi wonders if he should try an unco vered interest arbitrage #6>9% and thereby save the cost of forward cover. "any of TaIeshi@s TaIeshi@s research associates -- and their computer models -- are predicting the spot rate to remain close to ++E.00(; for the coming +E0 days. 6sing the same data as in the previous problem1 analy:e the 6>9 potential. Assumptions Arbitrage (unds a*ailable pot rate /$ 180)da' (orard rate /$ -%pe&ted spot rate in 180 da's /$ 180)da' .. dollar interest rate 180)da' apanese 'en interest rate
Value $5,000,000 118.60 117.80 118.00 3.800" !.300"
4en -@ui*alent 5!,000,000
Aritrage Rue o% hu&* +% the the di%%erence in intere"t intere"t rate" i" greater greater than the %orward %orward pre&iu&/di"count! pre&iu&/di"count! or expected change in the "pot rate %or U+A! ine"t in the higher intere"t #ieding currenc#' currenc#' +% the di%%erence in intere"t rate" i" e"" than the %orward pre&iu& (or expected change in the "pot rate)! ine"t in the ower #ieding currenc#' currenc#'
>i((eren&e in interest rates / i ) i $ -%pe&ted gain /loss on te spot rate IA pro(it potential
)1.300" 1.017" )0.!8!"
This tells TaIeshi 7amada that he should borrow yen an d invest in the higher yielding currency1 the 6.&. dollar1 to potentially gain on an uncovered basis #6>9%. #6>9%.
U! dollar interest rate ("#$ days) 3.800"
$5,000,000 B B B B B pot /$ 118.60 B B B 5!,000,000.00 apanese 'en #AR#
N
N
1.0230
N
N
)))))))))))))))D 18 1 80 da's ))))))))))))))))D
N
N
1.0170
N
!.300" %apanese yen interest rate ("#$ days)
N
$5,120,000 C C C C -%pe&ted pot Rate in 180 da's /$ 118.00 C C 603,160,000 60!,081,000 1,07,000 -E>
a% TaIeshi TaIeshi 7amada generates an uncovered interest arbitrage #6>9% profit of +10G<1000 if his ex pectations about the future spot rate1 the one in effect in +E0 days1 prove correct. b% The risI TaIeshi TaIeshi is taIing is that the actual spot rate rate at the end of the period can theoretically theoretically be anything1 better or worse for his speculative pos ition. He in fact has very little Owiggle room1O as they say. 9 small movement will cost him a lot of money. >f the spot rate ends up any stronger than about ++G.G<(; #a smaller number%1 he will lose mon ey. #Perify #Perify by inputting ++G.G0(; in the expected spot rate cell under as sumptions.%
Problem 6. ;openagen ;o*ered /A Heidi HQi 8ensen1 a foreign exchange trader at 8.*. "organ !hase1 can invest ;2 million1 or the foreign currency euivalent of the banI@s short term funds1 in a covered interest arbitrage with enmarI. 6sing the following uotes can Heidi maIe covered interest arbitrage #!>9% profit? Assumptions Arbitrage (unds a*ailable pot e%&ange rate /=r$ !)mont (orard rate /=r$ dollar !)mont interest rate >anis =roner !)mont interest rate
Value $5,000,000 6.1720 6.180 !.000" 5.000"
Aritrage Rue o% hu&* +% the di%%erence di%%erence in intere"t rate" i" greater than than the %orward pre&iu&/di"count! pre&iu&/di"count! or expected change in the "pot rate %or U+A! ine"t in the higher intere"t #ieding currenc#' currenc#' +% the di%%erence in intere"t rate" i" e"" than the %orward pre&iu& (or expected change in the "pot r ate)! ine"t in the ower #ieding currenc#'
>i((eren&e in interest rates /i=r ) i$
2.000" )1.678" 0.!22"
This tells Heidi HQi 8ensen that he should borrow dollars and invest in the higher yielding currency the anish Ironer1 for !>9 profit.
U! dollar interest rate (&'onth) !.000"
#AR# $
5,000,000.00 C C C C C pot /=r$ 6.1720 C C C =r !0,860,000.00
N
N
1.0075
N
-E>
N
$ $
)))))))))))))))D 0 0 da's ))))))))))))))))D
N
N
1.0125
N
N
5,0!7,500.00 5,031,26!.!1 !,76!.!1 B B B
5.000" Danish roner interest (&'onth) (& 'onth)
Heidi HQi 8ensen generates a covered interest arbitrage #!>9% profit because she is able to generate an even higher interest return in anish Ironer than she Ogives upO by selling the proceeds forward at the forward rate.
Problem 6.10 ;openagen ;o*ered / Heidi HQi 8ensen is now evaluating the arbitrage profit potential in the same marIet after interest rates change. #/ote that anytime the difference in interest rates does not exactly eual the forward premium1 it must be possible to maIe !>9 profit one way or another.% Assumptions Arbitrage (unds a*ailable pot e%&ange rate /=r$ !)mont (orard rate /=r$ dollar !)mont interest rate >anis =roner !)mont interest rate
Value $5,000,000 6.1720 6.180 3.000" 5.000"
=r -@ui*alent =r !0,860,000
a a
Aritrage Rue o% hu&* +% the di%%erence di%%erence in intere"t rate" i" greater than than the %orward pre&iu&/di"count! pre&iu&/di"count! or expected change in the "pot rate %or U+A! ine"t in the higher intere"t #ieding currenc#' currenc#' +% the di%%erence in intere"t rate" i" e"" than the %orward pre&iu& (or expected change in the "pot r ate)! ine"t in the ower #ieding currenc#'
>i((eren&e in interest rates /i=r ) i$
1.000" )1.678" )0.678"
This tells Heidi that she should borrow anish Ironer and invest in the FM$ interest rate currency1 the dollar1 gaining on the re-exchange of dollars for Ironer at the end of the period.
U! dollar interest rate (&'onth) 3.000"
$
5,000,000.00 B B B B B pot /=r$ 6.1720 B B B =r !0,860,000.00
#AR#
N
N
1.0100
N
N
)))))))))))))))D 0 da's ))))))))))))))))D
N
N
1.0125
N
5.000" Danish roner interest (&'onth) (& 'onth)
N
$
5,050,000.00 C C C C C <)0 /=r$ 6.180 C C =r !1,2,00.00 !1,2,00. 00 =r !1,235,750.00 =r 53,150.00 -E>
a% Heidi HQi 8ensen generates a covered interest arbitrage profit of Ir2=1+20 because1 although 6.&. dollar interest rates are lower1 the 6.&. dollar is selling forward at a premium against the anish Irone.
Problem 6.11 ;openage ;openagen n ;o*ered / ; Heidi HQi 8ensen is now evaluating the arbitrage profit potential in the same marIet after interest rates change. #/ote that anytime the difference in interest rates does not exactly eual the forward premium1 it must be possible to maIe !>9 profit one way or another.% Assumptions Arbitrage (unds a*ailable pot e%&ange rate /=r$ !)mont (orard rate /=r$ dollar !)mont interest rate >anis =roner !)mont interest rate
Value $5,000,000 6.1720 6.180 !.000" 6.000"
=r -@ui*alent =r !0,860,000
b b
Aritrage Rue o% hu&* +% the di%%erence di%%erence in intere"t rate" i" greater than than the %orward pre&iu&/di"count! pre&iu&/di"count! or expected change in the "pot rate %or U+A! ine"t in the higher intere"t #ieding currenc#' currenc#' +% the di%%erence in intere"t rate" i" e"" than the %orward pre&iu& (or expected change in the "pot r ate)! ine"t in the ower #ieding currenc#'
>i((eren&e in interest rates /i=r ) i$
!.000" )1.678" 1.!22"
This tells Heidi HQi 8ensen that she should borrow 6& dollars and invest in the H>)HM$ interest rate currency1 the Ironer1 gaining on the re-exchange of Ironer for dollars at the end of the period.
U! dollar interest rate (&'onth) !.000"
#AR# $5,000,000 C C C C C pot /=r$ 6.1720 C C C =r !0,860,000.00
N
N
1.0075
N
N
)))))))))))))))D 0 da's ))))))))))))))))D
N
N
1.0150
N
N
$ $ $
-E> 5,0!7,500.00 5,05!,710.87 16,210.87 B B B <)0 /=r$ 6.180 B B B =r !1,!22,00.00
6.000" Danish roner interest (&'onth) (& 'onth)
b% >f the anish Ironer interest rate increas es to 4.0051 while the 6.&. dollar inte rest rate stays at 3.005 and spot and forward rates remain the same1 Heidi HQi 8ensen@s !>9 profit is ;+41+0.EG.
Problem 6.12 ;asper Fandsten )) ;IA /A !asper Fandsten is a foreign exchange trader for a banI in /ew 'orI. He has ;+ million #or its &wiss franc euivalent% for a short-term money marIet investment and wonders whether he should invest in 6.&. dollars for <0 days or maIe a covered interest arbitrage #!>9% investment in the &wiss franc. He faces the following uotes
Assumptions Arbitrage (unds a*ailable pot e%&ange rate /;G<> !)mont (orard rate /;G<> > !)mont interest rate iss (ran& !)mont interest rate
Value $1,000,000 0.502 0.310 !.800" 5.!00"
Aritrage Rue o% hu&* +% the di%%erence di%%erence in intere"t rate" i" greater than than the %orward pre&iu&/di"count! pre&iu&/di"count! or expected change in the "pot rate %or U+A! ine"t in the higher intere"t #ieding currenc#' currenc#' +% the di%%erence in intere"t rate" i" e"" than the %orward pre&iu& (or expected change in the "pot r ate)! ine"t in the ower #ieding currenc#'
>i((eren&e in interest rates / i ;G<. ) i
1.500" !.11" 5.311"
This tells !asper he should invest in the higher yeilding !HA in order to earn covered interest arbitrage #!>9% profits.
U! dollar interest rate (&'onth) !.80"
#AR# $
1,000,000.00 C C C C C pot /;G<> 0.502 C C C
N
N
1.005
N
-E>
N
)))))))))))))))D 0 0 da's ))))))))))))))))D
N
N
1.01!!
N
N
$
1,00,500.00 1,02!,156.!8 $ 1!,656.!8 B B B 0.310 B B B
5.!0" !wiss franc interest rate ra te (&'onth)
a% !asper Fandsten maIes a net profit1 a covered interest arbitrage profit1 of ;+123E.=4 on each million he invests in the &wiss franc marIet #by going around the box%. He should therefore taIe advantage of it and perform covered interest arbitrage. b% 9ssuming a ;+ million investment for the <0-day period1 the ann ual rate of return on this near risI-less investment is
5.36"
Problem 6.1! ;asper Fandsten )) IA / 6sing the same values and assumptions as in *roblem +1 !asper Fandsten decides to seeI the full 3.E05 return available in 6.&. dollars by not covering his forward dollar receiptsRan uncovered interest arbitrage #6>9% transaction. 9ssess this decision.
Assumptions Arbitrage (unds a*ailable pot e%&ange rate /;G<> !)mont (orard rate /;G<> -%pe&ted spot rate in 0 da's /;G<> > !)mont interest rate iss (ran& !)mont interest rate
Value $1,000,000 0.502 0.310 1.2700 !.800" 5.!00"
&ince !asper is in the 6& marIet #starting point%1 if he were to undertaIe uncovered interest arbitrage he would be first exchange dollars for &wiss francs1 investing the &wiss francs for <0 days1 and then exchanging the &wiss franc proceeds #principle and interes t% bacI into 6& dollars at whatever the s pot rate of exchange is at that th at time. >n this case !asper will have to -- at least in his mind -- maIe some assumption as to what the exchange rate will be at the end of the <0 day period.
U! dollar interest rate (&'onth) !.80"
#AR#
$
1,000,000 C C C C pot /;G<> 0.502 C C C ;G< 50,200
N
N
1.005
N
-E>
N
1,00,500.00 1,00,5!1.36 !1.36 B B B -%pe&ted pot /;G<> 0.5!7 B B
N
;G< 62,70
)))))))))))))))D 0 da's ))))))))))))))))D
N
N
1.01!!
N
$ $ $
5.!0" !wiss franc interest rate ra te (&'onth)
>f !asper assumed the spot rate at the end of <0 days will be !HA0.<23G(6& #the >$* implied 3-month forward rate%1 the 6>9 transaction would produce the full 3.E05 return available in 6&.
Aor 6>9 transaction to result in higher 6& proceeds at the end of the 3-month period1 the ending spot rate of exchange would have to be less than !HA0.<23G(6& #a stronger !HA will result in more 6& when the final exhchange is made%. &hould !asper do it? ell1 depends on his banI@s policies on uncovered transactions1 and his beliefs on the future spot exchange rate. But1 given that he is invested in a foreign currency with a lower interest rate1 not a higher one1 so he is placing all of his @bets@ on the ex change rate1 it is not a speculation specu lation for the weaI of heart.
Problem 6.13 ;asper Fandsten Fandsten )) #irt' >a's >a's Fater ne month after the events described in *roblems + and +31 !asper Fandsten once again has ;+ million #or its &wiss franc euivalent% to invest for <0 days. He now faces the following foreign exchange and interest rates. &hould he again enter into a !>9 investment? Assumptions Arbitrage (unds a*ailable pot e%&ange rate /;G<> !)mont (orard rate /;G<> dollar !)mont interest rate iss (ran& !)mont interest rate
Value $1,000,000 0.352 0.310 6.800" 3.!00"
Aritrage Rue o% hu&* +% the di%%erence di%%erence in intere"t rate" i" greater than than the %orward pre&iu&/di"count! pre&iu&/di"count! or expected change in the "pot rate %or U+A! ine"t in the higher intere"t #ieding currenc#' currenc#' +% the di%%erence in intere"t rate" i" e"" than the %orward pre&iu& (or expected change in the "pot r ate)! ine"t in the ower #ieding currenc#'
>i((eren&e in interest rates / i ;G ;G< ) i >
)2.500" 1.785" )0.715"
This tells !asper Fandsten he should borrow 6.&. dollars and invest in the lower yielding currency1 the &wiss franc1 and then sell the &wiss franc principal and interest forward three months locIing in a !>9 profit.
U! dollar interest rate (&'onth) 6.80"
#AR# $1,000,000 C C C C C pot /;G<> 0.352 C C C ;G< 35,200.00
N
N
1.017000
N
-E>
N
)))))))))))))))D 0 0 da's ))))))))))))))))D
N
N
1.0107500
N
N
$
1,017,000.00 1,015,261.!2 $ /1,7!8.68 B B B <)0 /;G<> 0.310 B B B ;G< 55,!60.0
3.!0" !wiss franc interest rate ra te (&'onth)
!asper can maIe a covered interest arbitrage profit of 6&+1G3E.4E on each million 6&-euaivalent &wiss franc #by going around the box%. He should therfore taIe advantafe of it and perform covered interest arbitrage.
Problem 6.15 tatoil o( Eora' Eora'Hs Hs Arbitrage &tatoil1 the national oil company of /orway1 is a large1 sophisticated1 and active participant in both the currency and petrochemical marIets. marIets. 9lthough 9lthough it is a /orwegian company company11 because it operates operates within the global oil marIet1 marIet1 it considers the 6.&. dollar as its functional currency1 currency1 not the /orwegian Irone. 9ri 7arlsen is a currency trader for &tatoil1 and has immediate use of either ;3 million #or the /orwegian Irone euivalent%. He is faced with the following marIet rates1 and wonders whether he can maIe some arbitrage profits in the coming <0 days. Assumptions Arbitrage (unds a*ailable pot e%&ange rate /Eo=$ !)mont (orard rate /Eo=$ .. dollar !)mont interest rate Eoregian =rone !)mont interest rate
Value $!,000,000 6.0!12 6.0186 5.000" 3.350"
?rone -@ui*alent 18,0!,600
Aritrage Rue o% hu&* hu&* +% the di%%erence di%%erence in intere"t rate" i" greater greater than the %orward %orward pre&iu&/di"coun pre&iu&/di"count! t! or expected change change in the "pot rate % or U+A! ine"t in the higher intere"t #ieding currenc#' currenc#' +% the di%%erence in intere"t rate" i" e"" than the %orward pre&iu& pre&iu& (or (or expected change change in the "pot rate)! ine"t in the ower ower #ieding currenc#' currenc#'
>i((eren&e in interest rates / i Eo= ) i $
)0.550" 0.8!5" 0.285"
This tells 9ri 7arlsen he should borrow 6.&. dollars and invest in the lower yielding currency1 the /orwegian /orwegian Irone1 selling the dollars forward <0 days1 and therefore earn covered interest arbitrage #!>9% profits.
*orwegian rone interest rate (&'onth) 3.350"
18,0!,600.00
N
N
1.0111250
N
N
B B B B B pot /Eo=$ 6.0!12 B
C C C C
)))))))))))))))D 0 0 da's ))))))))))))))))D
B
C
B $
!,000,000.00 orro $
18,23,81.!0 C
N
N
1.01250000
N
N
$ $ $
!,0!,710.25 !,0!7,500.00 2,210.25
5.000" #AR#
U! dollar interest rate (&'onth)
-E>
9ri 7arlsen can maIe ;1+0.2 for &tatoil on each ;3 million he invests in this covered interest arbitrage #!>9% transaction. /ote that this is a very slim slim rate of return on an investment investment of such a large large amount. Annuali:ed rate o( return
0.237"
Problem 6.16 eparated b' te Atlanti& The separation of over 31000 nautical miles mi les and five time :ones1 money and foreign exchange marIets in both Fondon and /ew 'orI 'orI are very efficient. The following foll owing information has been collected from the respective areas Assumptions &pot exchange rate #;(S% ne-year Treasury Treasury bill rate Mxpected inflation rate
Fondon 1.!263 !.00"
Ee 4or= 1.!263 3.500"
6nInown
1.250"
a. hat do the financial marIets suggest suggest for inflation in Murope next year? year? b. Mstimate today@s one-year one-year forward exchange exchange rate between between the dollar and the euro.
a. at do te (inan&ial mar=ets suggest (or in(lation in -urope ne%t 'ear9
9ccording to the Aisher effect1 real interest rates should be t he same in both Murope and the 6&. &ince the nominal rate , #+real% x #+expected inflation% U - + + real rate , #+ nominal% ( #+ expected inflation% + nominal rate + expected inflation &o + real , and therefore the real rate in the 6& is
10!.00" 9 10!.210"
#e e%pe&ted rate o( in(lation in -urope is ten
J
0.66"
b. -stimate toda'Hs one)'ear (orard e%&ange e%&ange rate beteen te dollar and te euro. euro.
&pot exchange rate #;(S% 6& dollar one-year Treasury bill rate Muropean euro one-year Treasury bill rate K Kn ne 'ear (orard rate /$L
1.!263 3.500" !.00" 1.!!31
103.500" 101.250" 10!.210" !.210"
Problem 6.17 ;amoni% ;ateau ;ateau Rentals 'ou are planning a sIi vacation to "t. Blanc in !hamonix1 Arance1 one year from now. 'ou are negotiating over the rental of a chateau. The chateau@s owner wishes to preserve his real income against both inflation and exchange rate changes1 and so the present weeIly rent of S<1E00 #!hristmas season% will be adJusted upwards or downwards for any change in the Arench cost of living between now and then. 'ou 'ou are basing your budgeting on purchasing power parity #** *%. Arench inflation is expected to average 3.25 for the coming year1 while 6.&. dollar inflation is expected to be .25. The current spot rate is ;+.340(S. hat should you budget as the 6.&. dollar cost of the one weeI rental? Assumptions &pot exchange rate #;(S% Mxpected 6& inflation for coming year Mxpected Arench inflation for coming year !urrent chateau nominal weeIly rent #S%
Value $1.!620 2.500" !.500" L ,800.00
Value
Pur&asing poer parit' e%&ange rate (ore&ast /$L
1.!388
&pot #one year% , &pot x # + 6&; inflation % ( # + Arench inflation % Eominal montl' rent, in euros, one 'ear (rom no
10,13!.00
$ent now x # + inflation Arance % ;ost o( rent one 'ear (rom no in dollars
$
1!,681.2
$ent one year from now ( *** * ** forecasted spot rate /ote students may inuire as to whether the euro1 a currency for a multitude of countries which may actually have substantial differencies in inflation locally1 really will react to inflationary pressures and differentials differentials as *** would predict. predict. 9 good uestion.
Problem 6.18 -ast Asiati& ;ompan' )) #ailand The Mast 9siatic !ompany #M9!%1 a anish company with subsidiaries all over 9sia1 has been funding its BangIoI subsidiary primarily with 6.&. dollar debt because of the cost and availability of dollar capital as opposed to Thai baht-denominated #B% #B% debt. The treasuer treasuer of M9!-Thailand is is considering a one-year one-year banI loan for ;201000. The current spot rate is B3.04(;1 and the dollar-based interest is 4.G25 for the one year period. ne year loans are +.005 in baht. a. 9ssuming expected inflation rates of =.35 and +.25 in Thailand and the 6nited &tates1 repectively1 repectively1 for the coming year1 according according to purchase power parity1 what would the effective cost of funds be in Thai baht terms?
b. >f M9!@s foreign foreign exchange advisers believe believe strongly that that the Thai government government wants to push the value of the baht down against the dollar dollar by 25 over the the coming year year #to promote its export competitiveness competitiveness in dollar marIets%1 what might the effective cost of funds end up being in baht terms? c. >f M9! could borrow Thai baht at +35 per annum1 would this be cheaper than either part #a% or part #b% above?
Assumptions ;urrent spot rate, #ai bat$ -%pe&ted #ai in(lation -%pe&ted dollar in(lation Foan prin&ipal in .. dollars #ai bat interest rate, 1)'ear loan dollar interest rate, 1)'ear loan
Value !2.06 3.!00" 1.250" $250,000 12.000" 6.750"
Airst1 it is necessary to forecast the future spot exchange rate for the baht(;. PPP (ore&ast o( #ai bat$
!!.0258
ifferent ifferent expectations of the future spot exchange rate1 either *** for part a%1 or an expected devaluation for part b%1 allow the isolation of exactly exactly how many Thai baht would be reuired reuired to repay the dollar loan. loan.
U! dollar borrowing rate (one year) 6.750" $
250,000 C C C C C pot /at$ !2.0600 C C C 8,015,000.00 #ai bat
N
N
1.06750
N
N
)))))))))))))))D !60 da's ))))))))))))))))D
12.000" #ai bat borroing rate /one 'ear Iplied cost + (,epaid-Initial proceeds) proceeds) ' "
$
266,875 C C C C C -%pe&ted pot /at$ !!.0258 C C 8,81!,760.!8 at needed to repa' .. dollar loan
.66"
a% 9ssuming a purchasing power parity forecast of the future spot rate1 B33.02E(;1 it will taIe E1E+31G40 baht to repay the 6.&. dollar loan. The implied cost of funds1 in baht terms1 is <.<445. b% 9ssuming a future spot rate for the baht which is 25 weaIer than than the current spot rate rate #B3.04(; ÷ # + - .02%1 or B33.G=G=(;%1 the implied cost is +.34<5. #This is found by plugging in this new forecast spot rate in the expected spot rate cell on the right-hand-side of the box.% ;urrent !2.0600 P&t ;g )5.00" Ee spot M old spot ÷ / 1 ) .05
Problem 6.1 altese magine that the mythical solid gold falcon1 initially intended as a tribute by the 7nights of "alta to the 7ing of &pain in appreciation for his gift of the island of "alta to the order in +2301 has recently been recovered. The falcon is += inches high and solid gold1 weighing approximately =E pounds. 9ssume that gold prices have risen to ;==0(ounce1 primarily as a result of increasing political t ensions. The falcon is currently held by a private in vestor in >stanbul1 who is actively negotiating with the "altese government on its purchase and prospective return to its island home. The sale and payment are to taIe place one year from now in "arch 00=1 and the parties are negotiating over the price and currency of payment. The investor has decided1 in a show of goodwill1 to base the sales price only on the falcon@s specie value V its gold value.
The current spot exchange rate is 0.3< "altese lira #"F% per +.00 6.&. dollar. "altese inflation is expected to be about E.25 for the coming year1 while 6.&. inflation1 on the heels of a double-dip recession1 is expected to come in at only +.25. >f the investor bases value in the 6.&. dollar1 would he be better off receiving "altese lira in one year #assuming purhcasing power parity%1 or receiving a guaranteed do llar payment #assuming a gold price of ;=0 per ou nce%?
eigt o( (al&on, in pounds #otal number o( oun&es in eigt Pri&e o( gold, $oun&e
$ $
Eo 38 768 330.00 !!7, !!7,2 20. 0.00 00
$ $
In Kne 4ear 38 768 320.00 !22, !22,56 560. 0.00 00
The purchasing power parity forecast of the "altese lira(dollar exchange rate ;urrent spot rate, altese lira$ -%pe&ted altese in(lation -%pe&ted dollar in(lation PPP (ore&ast o( altese lira$
0.!00 8.500" 1.500" 0.316
>f the investor bases his gross sales proceeds in 6.&. dollars1 the guaranteed dollar payment at ;=0(ounce yields a larger amount #;31240% than accepting "altese lira assuming *** #;3+41++4%.
In*estor Re&ei*es in ar& 2003 Assuming PPP $ !16,116 B B
;urrent Value $ !!7,20 C C C C C pot /F$ 0.!00 C C C 1!1,788.80 altese lira
)))))))))))))))D !6 !60 da's ))))))))))))))))D
B B B -%pe&ted pot /F$ 0.316 B B B 1!1,788.80
Problem 6.20 ala'sian Ris= !layton "oore is the manager of an international money marIet fund managed out of Fondon. 6nliIe many money funds that guarantee their investors a near risI-free investment with variable interest earnings1 !layton "oore@s fund is a very aggressive fund that searches out relatively high interest earnings around the globe1 but at some risI. The fund is pound-denominated. !layton is currently evaluating a rather interesting opportunity in "alaysia. &ince the 9sian !risis of +<n 0021 the "alaysian government allowed the currency to float against several maJor currencies. The current spot rate today is $"3.+3=E2(;. Focal currency time deposits of +E0-day maturities are earning E.<005 per annum. The Fondon eurocurrency marIet for pounds is yielding =.005 per annum on similar +E0-day maturities. The current spot rate on the British pound is ;+.2E0(W1 and the +E0-day forward rate is ;+.224+(W.
Assumptions *rincipal investment1 British pounds &pot exchange rate #;(W% +E0-day forward rate #;(W% "alaysian ringgit +E0-day yield &pot exchange rate1 "alaysian ringgit(;
$ $
Values N1,000,000.00 1.5820 1.5561 8.00" !.1!83
The initial pound investment implicitly passes through the dollar into "alaysian ringgit. The ringgit is fixed against the dollar1 hence the ending "alaysian ringgit(; rate is the same as the current spot rate. The pound1 however1 is not fixed to either the dollar or ringgit. !layton "oore can purchase a forward against the dollar1 allowing him to cover the dollar(pound exchange rate.
6.188"
,eturn + (Proceeds-Initial (Proceeds-Initial in.estent) in.estent) ' " Initial In*estment
In*estment Pro&eeds
N1,000,000.00
N1,061,883.83
C C C C pot /$N 1.5820 C
B B B B <d)180 /$N 1.5561 B
British pounds pounds .ersus U! dollars dollars )))))))))))))))D 180 da's ))))))))))))))))D
C C $
B B 1,582,000
.. dollar *alues
1,652,!
C
B
C C
B B
C pot /$$ !.1!83 C C
$
C 3,63,38.80 ala'sian ringgit
B -%pe&ted pot /$$ !.1!83 B B
/alaysian ringgit ringgit .ersus U! U! dollars )))))))))))))))D 18 180 da's ))))))))))))))))D
N
N
1.0335
N
N
B 5,185,88.02 Ringgit pro&eeds
8.00" ala'sian ringgit deposit rate /180 da's
>f !layton "oore invests in the "alaysian ringgit deposit1 and accepts the uncovered risI associated with the $"(; exchange rate #managed by the government%1 and sells the dollar proceeds forward1 he should expect a return of 4.+EE5 on his +E0-day pound investment. This is better than the =.005 he can earn in the euro-pound marIet.
>nterestingly1 if !layton chose to /T sell the dollars forward1 and accepted the uncovered risI of the ;(W exchange rate as well1 he may or may not do better than 4.+EE5. Aor example1 if the spot rate remained unchanged at ;+.2E0(W1
Problem 6.21 #e eer tandard >n +<<< the Mconomist maga:ine reported the creation of an index or standard for the evaluation of 9frican currency values using the local prices of beer. Beer was chosen as the product for comparison because "conald@s had not peneterated the 9frican continent beyond &outh 9frica1 and beer met most of the same product and marIet characteristics characteristics reuired for for the construction construction of a proper proper currency index. index. >nvestec1 >nvestec1 a &outh 9frican investment investment banIing banIing firm1 has replicated replicated the process of creating a measure of purchasing power parity #***% liIe that of the Big "ac >ndex of the Mconomist1 for 9frica.
The index compares the cost of a 3G2 milliliter bottle of clear lager beer across sub-&ahara 9frica. 9s a measure of *** the beer needs to be relatively homogeneous homogeneous in uality across countries1 needs to possess substantial elements of local manufacturing1 inputs1 distribution1 and service1 in order to actually provide a measure measure of relative purchasing purchasing power. power. The beers are first first priced in local local currency #purchased #purchased in the the taverns of the local man1 and not not in the highhigh priced tourist centers%1 centers%1 then converted converted to &outh &outh 9frican 9frican rand. The The prices of the beers beers in rand are then then compared to form one measure of of whether the local local currencies are undervalued #-5% or overvalued #5% versus the &outh 9frican rand. 6se the data in the exhibit and complete the calculation of whether the individual currencies are under- or over-valued.
;ountr' out A(ri&a otsana +ana ?en'a alai auritius Eamibia Oambia Oimbabe
eer ;astle ;astle tar #us=er ;arlsberg Poeni% indoe= ;astle ;astle
Fo&al &urren&' Rand Pula ;edi illing ?a&a Rupee E$ ?a&a O$
eer Pri&es Fo&al &urren&' 2.!0 2.20 1,200.00 31.25 18.50 15.00 2.50 1,200.00 .00
/otes +. Beer price in &outh 9frican rand , *rice in local currency ( spot rate on 3(+2(<<. . >mplied *** exchange rate , *rice in local currency ( .30. 3. 6nder or overvalued to rand , >mplied *** rate ( spot rate on 3(+2(<<.
In rand ---2.3 !.17 3.02 2.66 !.72 2.50 !.52 1.36
Implied PPP rate ---0.6 521.73 17.! 8.03 6.52 1.0 521.73 !.1
pot rate /!15 ---0.75 !7.10 10.27 6.6 3.0! 1.00 !30.68 6.15
nder or o*er*alued to rand /" ---27." !7.6" 73.6" 15.6" 61.8" 8.7" 5!.1" )!6.3"
Problem 6.22 +rupo imbo /e%i&o )rupo Bimbo1 headuartered in "exico !ity1 is one of the largest baIery companies in the world. n 8anuary +st1 when the spot exchange rate is *s+0.E0(;1 *s+0.E0 (;1 the company borrows ;2.0 million from fro m a /ew 'orI 'orI banI for one year at 4.E05 interest #"exican banIs had uoted <.405 for an euivalent loan in pesos%. uring the year1 6.&. inflation is 5 and "exican inflation is =5. 9t the end of the year the firm repays the dollar loan. a. >f Bimbo expected the spot rate at the end of one year to be that eual to purchasing power parity1 what would be the cost to Bimbo of its dollar loan in peso-denominated interest? b. hat is the the real interest interest cost #adJusted #adJusted for inflation% to to Bimbo1 in peso-denominated peso-denominated terms1 of borrowing borrowing the dollars dollars for one year1 again assuming purchasing power parity ? c. >f the actual spot rate at the end of the year year turned out to be *s<.40(;1 what was the actual peso-denominated peso-denomina ted interest cost of the loan? orroing prin&ipal ;urrent spot rate, pesosdollar /Ps$ e%i&an in(lation /a&tual dollar in(lation /a&tual PPP (ore&ast o( spot rate /Ps$ A&tual spot rate end o( 'ear /Ps$ A&tual spot rate end o( 'ear /Ps$
$
25,000,000 10.800 3.00" 2.00"
Spot (PPP) = S , ( . P" ) / ( . $ )
11.01 .60 .60
.. dollar borroing rate rate /one 'ear 6.800" $
25,000,000 C C C C C pot /Ps$ 10.80 C C C 270,000,000 e%i&an pesos
N
N
1.0680
N
N
)))))))))))))))D !6 !60 da's ))))))))))))))))D
$
26,700,000 C C C C C -K4 pot /Ps$ 11.01 C C
23,013,118 Pesos needed to repa' .. dollar loan .600" uoted e%i&o peso borroing rate /one 'ear Iplied cost + (,epaid-I nitial proceeds) ' "
8.83"
a. >f the ending spot rate was *s++.0+(; as *** would predict1 the actual peso-based interest cost would be
8.83".. 8.83"
b. #e real peso)denominated peso)denominated interest &ost /&orre&ted (or in(lation ould ould be The calculation shown at right is the p recise or exact answer. The approximate form1 found simply by subtracting inflation from nominal interest1 would be 3.83".
Eominal interest A&tual in(lation Real peso)interest
8.830" 3.0000" 3.7058"
b. >f the actual end of year spot rate was *s<.40(; #Just plug it into the spreadsheet for the M' &pot rate%1 the actual peso)5.067".. /4es, a negati*e interest rate. denominated interest cost would be )5.067"
Problem 6.2! A*toV A*toVAO AO o( RussiaHs ?alina -%port -%por t Pri&ing Anal'sis 9vtoP9L 9vtoP9L 91 a leading auto manufacturer in $ussia1 was launching a new automobile model in 00+1 and is in the midst of completing a complete pricing analysis of the car for sales in $uss ia and export. The new car1 the 7alina1 would be initially priced at $ubles 401000 in $ussia1 and if exported1 ;E1444.4G in 6.&. dollars at the current spot rate of $ubles 30 , ;+.00. 9vtoP9 9vtoP9L L intends to raise the price domestically with the rate of $ussian inflation over time1 but is worried about how that compares to the export price given 6.&. dollar inflation and the future exchange rate. 6se the following data table to answer the pricing analysis uestions. ;alendar 'ear 7alina *rice #rubles% $ussian inflation #forecast% 6.&. inflation #forecast% Mxchange rate #rubles , 6& +.00%
2001 401000
2002
200!
2003
2005
2006
+=.05 .25
+.05 3.05
++.05 3.05
E.05 3.05
E.05 3.05
30.00
a. >f the domestic price of the 7alina increases with the rate of inflation1 what would its price be over the 00-004 period? b. 9ssuming that that the forecasts of 6& and $ussian inflation inflation prove accurate1 accurate1 what would the value of the the ruble be over the coming coming years if its its value versus the dollar followed purchasing power parity? c. >f the export price of the 7alina were set using the purchasing power parity forecast of the ruble-dollar exchange rate1 what would the export price be over the 00-004 period? d. How would the 7alina@s export price evolve over time if it followed $ussian inflation and the exchange rate of the ruble versus the do llar remained relatively constant over this period of time? e. Plad1 one of the newly hired pricing strategists1 believes that prices of automobiles in b oth domestic and export marIets will both increase with the rate of inflation1 and that the ruble(dollar exchange rate will remain fixed. hat would this imply or forecast for the future export price of the 7alina? f. >f you were 9vtoP9 9vtoP9L1 L1 what would you hope would happen to the ruble@s value versus the dollar over time given your desire to export the 7alina? /ow if you combined that @hope@ with some assumptions about the competition -- other automobile sales prices in dollar marIets over time -- how might your strategy evolve? g. &o what did the $ussian ruble end up doing over the 00+-004 period?
;alendar 'ear
2001
2002
200!
2003
2005
2006
a. 7alina 7alina *rice with $ussian $ussian inflation inflation #rubles% #rubles%
401000 401000
<41=00 <41=00
33+1<4E 33+1<4E
34E1=E= 34E1=E=
3
=<1E00 =<1E00
b. Mxchange rate #rubles,;+.00% #rubles,;+.00% if purchasing power parity #***% holds
30.00
33.3G
34.E
3<.+0
=+.00
=.<<
c. Mxpo Mxport rt pric pricee if usin using g *** *** #dol #dolla lars rs%%
;
E144 E1444. 4.4G 4G
;
E1EE E1EE3. 3.33 33
;
<1+= <1+=<. <.E3 E3
;
<1= <1==. =.33 33
;
<1G0 <1G0G. G.04 04
;
<1<< <1<
d. Mxport Mxport price at fixed fixed exchange exchange rate #dollars% #dollars%
;
E1444.4G E1444.4G
;
<1EE0.00 <1EE0.00
;
++1042.4 ++1042.40 0
;
+1E.E +1E.E
;
+3142.== +3142.==
;
+=134.4E +=134.4E
9n added note is to recogni:e that if this was the case1 *** is definitely not @holding@ in the academic sense. e. Plad is actually not saying anything different different than what uestions c% and d% addressed. >f the export price is based on the initial dollar price of ;E144G.4G then rising with dollar inflation1 it reaches ;<1<f expo export rt pric pricee rise risess at doll dollar ar infl inflat atio ion n
;
E144 E1444. 4.4G 4G
;
E1EE E1EE3. 3.33 33
;
<1+= <1+=<. <.E3 E3
;
<1= <1==. =.33 33
;
<1G0 <1G0G. G.04 04
;
<1<< <1<
f. Mxporters generally would prefer that their own currency weaIens over time versus the currency of the customer -- maIing their product offering increasingly affordable #cheaper%1 #cheaper%1 and hopefully increasing sales volume. &ince 9vtoP9 9vtoP9L@s L@s costs are all in $ussian rubles1 earning a hard currency liIe the dollar which would be slowly strengthenging against the ruble might increase profit margins #depending on what happens to costs over time from other factors%.
>f most of the competition in the t arget dollar marIets were dollar-based dollar-based manufacturers1 their costs and prices might be rising with dollar inflation. The answers to parts c% and d% provide some ideas or possible boundaries on what you might consider. 9t 9t fixed exchange rates1 the dollar price would rise uite high by 004 #to ;+=134.4E%1 whereas if rate of exchange had remained fixed the export price would be much lower in 004 #;<1<