Extra Final Ex Problems (1).docx

Extra Final Ex Problems (1).docx - Extra F494 Problems...

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Extra F494 Problems Spring 2018 1) Suppose an Australian company exports to the UK, and it is trying to forecast the exchange rate between Australia and the UK (#AUD/1GBP). You have obtained the following projections for the year 2018: Australia UK Expected inflation over year 2018 1.9% 2.5% Expected real GDP growth in 2018 2.4% 1.8% Expected nominal interest rate in 2018 2.2% 0.75% a) What does Relative Purchasing Power Parity (relative PPP) predict will be the % change in the #AUD/GBP over 2018? How would this change likely impact the value of the Australian company’s exports to the UK? Answer: Using the inexact Rppp formula: = -0.6% appreciation of the AUD AUD value of exports will decline b) If the current exchange rate is AUD 1.83/GBP, what does Relative PPP predict will be the future exchange rate 1 year from today? = AUD 1.819/GBP c) What do the other economic variables suggest about the direction of the AUD/GBP? Relative real interest rates suggest an appreciation of the AUD Relative GDP growth rates: Trade flows effect: AUD depreciates Financial Flows effect: AUD appreciates 2) Suppose an investor sees the following quotes: Canadian dollar (CA) and British pound (BP): S(\$/AUD) = \$0.76/AUD S(\$/GBP) = \$1.39/GBP S(AUD/GBP) = AUD 1.81/GBP Given these quotes, is there a triangular arbitrage opportunity if start with \$1m? Triangular Arbitrage is profitable…the profit on \$1million is \$10,468 1

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3) Suppose the Australian producer is considering borrowing in Australia or in the U.K.
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