Econ+161B++sample+midterm++2

Econ+161B++sample+midterm++2 - Econ 161B Midterm Exam II...

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Unformatted text preview: Econ 161B Midterm Exam II A.Sohrabin Spring 2006 1. During 1995, the Mexican peso exchange rate rose from pesoS.33/$ to 3. peso7.64/$. At the same time, U.S. inflation was approximately 3% in contrast to Mexican inflation of about 48.7%. a. How much did the nominal value of the peso change over this period? b. By how much did the real value of the peso change over this period? a. What is purchasing power parity? b. What are some reasons for deviations from purchasing power parity? c. Under what circumstances can purchasing power parity be applied? You have the following quotations and expectations for the British pound. Present spot rate $1.5800/L Six—month forward rate $1,6100/L Your expectation for spot rate in six months $1.6500/L Six— month call options on pounds at a strike price of $1 .58 sell for a premium of 4 cents per pound on the Philadelphia Stock Exchange. Assume you have $5,000,000 with which to speculate. Ignore transaction costs, taxes, and interest that might be earned on idle cash balances. a. If your expectations prove correct. what would be your dollar profit from speculating in the spot market”? b. If your expectations prove correct, what would be your dollar profit from speculating via the forward rnarket’.7 e, if your expectations prove correct, what would be your dollar profit from speculating via the option market? 4- On January 10, Volkswagen agrees to import auto parts worth $7 million from the United States. The parts will be delivered on March 4 and are payable immediately in dollars. VW decides to hedge its dollar position by entering into IMM futures contracts. The spot rate is $0.8947/euro and the March futures price is $0.9002/euro. ' ' a. Calculate the number of futures contracts that VW must buy to offset its dollar exchange risk on the parts contract. b. On March 4, the spot rate turns out to be $0.8952/euro, while the March fiitures price is $0.8968/euro. Calculate VW’s net euro gain or loss on its futures position. Compare this figure with VW’s gain or loss on its unhedged position, 1. a. What is purchasing gswer parity? Stages that grice stis shouid be équai watidwéde whea 5 home mus; {EC} shouié have $233 same pusshasing whéck is mad megs fiammfiy 1392?, 3:3th is igfisgi changes in the pdm: 23$ Egg: sxamfiig, if iaflatieg is 5% in $15 {1:25:25} Saws 331% §% £2 E35223, Shes; £338 £333: vaégg <3? {ha 33.93135 3:33: mus: fisg by 35%: figs :13 sqaaiiz: the zififiaz‘ §§§€§$ a}? ggsds ii: {123 mg atfiimii‘igs. ANSWER, in ks 35:95am version, garchasing pswer parity €E§f€$§€é ii: 5 2331mm: gun'engy. Er; agile: amfis, a mi: 3 §§3W§§ gignaé the Wfifid, Elm reg‘afg‘vg varsien sf immhasing pews: gazitgg am: {he axskaggg mm §eiwegfi the hem: cmfisy anfi any fézeigg gimme? wig adjust 38216555 $5 $56 Wm wzfimfi %, What £53 @315 magma 3%}: isgéafiens fiat}: pifichasing gawez‘ gag??? MSWER‘ {5%}? might :23: 316% heaaigsg: e E’he i}!ng iaéisgs 35% is) masms £33}? may use éiffsrcnt wang s3: diffcgsaé: gémis am: gswisfis‘ a fi§i§agg may 53:31:33 saggy, 33363352: 3?: gaff; mid fiber trad: Earriags and high mysmfiea eggs? 9% gm} risky, $336333: iariggs coilié Cilng figfing tfig timc $3121: at: item i3 in mi: Esmgea geggzxieg. Sims same gawk am: servicss arsed in {215 indices as net traded, there :an be gage {Eisisregzamiag between magma; a a {iifffirmtiain é Regatta prigg chagges Cfiuié {Eaii :0 exahangg rate chmgss even in the 82338386 {2f at: inflatifi Gaveman: iaiewegiifig waist! isaé :9 g éfieqaéfibréua: exciiange {ma 5 C. Under what circumstances can purchasing power parity be applied? ANSWER. The relative version of ' - . Purchasmg power panty holds - . of t - v « . _ « UP best In two cumstan . . tend‘ifmggnmg mth amoderato mflatlon differential" since the generixlrtrend ‘ 6:13. (a2 over iong Pet-1295 with hi h M . e C emf’f relative PHCC Changes, and (b) in the short run (1min 3 Price love! {ano ml] g anon Chang“ m the general lava! 0fPrices quich swamp the effects 553:2: Zzhypehtznflamn Since cc c nges. a. Speculation in the sgot mgrkgg, Today, buy-2~o{EE s: ss,ooo,ooo/1.saod a £3,164,557 In 6 mos., buy 5 with E: E3,164,557x1.65 a $5 21 519 221,519 Profit six months hence: t1. te r a 1 e 1 i Today, buy 6-month forward E with s: $5,000,000/1.6100 = £3,105,590 In 6 months, sell those pounds spot: £3,105,590x1.6500 = $5 1 3 Profit six months hence: S 124,223 ecu a on n t e a ti 6 a , A single contract is Today: Buy call options on pounds. ound sterling or $500 pet for £12,500 and costs 4 cents par 9 contract. With $5,000,000 you can afford to purchase $5,000,000!$500 & 10,000 contracts at $500 each. (The mnrket might not be big enough to absorb this size tgansactiong but a somewhat similar tgansaction could grahahiy be agrangeé in the bank ove:¢thg~¢ounter ogtiona finrkgtg; year 10,000 agtion contraotgf reoeiving (185000 oontracts}{€izf§§0 pg: contract) 3 £125,006g000 at 51‘58iE, £0: & total gnrahase grige of $1§?,§§§g0086 Simultaneously 391; 2125;008;003 5§§t fit $LQSSEE, gecei?ing $285,250g8808 Your :esuita: in 32K months: Exeroise $235.259*366 Eroceedg from sale: 135g cosfi of gurchage: lass gosfi of ogtiongz of" 7 Est groiit s fl # ,2; ; On January 10, Volkswagen agrees to import auto parts worth $7 million from the United fitness, the parts will , be delivered on March 4 and are payable immediately in dollars, VW decides to hedge its clutter position by entering into [MM futures contracts. The spot rate is $0‘8947IE and the March futures price is 50,9002/6, Calculate the number of futures contracts that W must buy to offset its dollar exchange risk on the parts : contract. r ANSWER. Volkswagen can lock in a euro price for its imported parts by buying dollars in the futures market at the current March futures price of 81.1 109/331 (1/03002) This is equivalent to selling euro futures contracts. At that futures price, VW will sell 67,776,050 for $7 million. At €125,000 per futures contract, this would entail selling 62 contracts (7,776,050/125,000 = 62.21) at a total cost of 67,750,000. b. On March 4, the spot rate turns out to be 50.895216, while the March futures price is $0.3968IE. Calculate } VW's net euro gain or loss on its futures position. Compare this figure with VW's gain or loss on its unhedgcd ! position. ~ ANSWER. Under its futures contract, Volkswagen has agreed to sell 67,750,000 and receive $6,976,550 (7,750,000 2 x 09002). On March 4, VW can close out its futures position by buying back 62 March euro futures contracts (worth 67,750,000). At the current futures rate of 30.8968/6, VW must pay out 36,950,200 (7,750,000 x 0.8968). Hence, VW has a net gain of $26,350 ($6,976,550 - $6,950,200) on its futures contract. At the oinrent spot rate of 30.895216, this translates into a gain of 629,434.76 (26,350/0.8952). Upon closing out the 62 futures contracts, VW will then buy $7 million in the spot market at a spot rate of $0.8952/6. lts net cost is 3,790,046.92 (7,000,000/0.8952 — 29,434.76). [f VW had not hedged its import contract, it could have bought the $7 million on March 1.0 at a cost of € 7,819,481.68 (7,000,000/0.8952). This contrasts with a projected cost based on the spot rate on January 10th of €7,823,85l.57 (7,000,000/0.8947). However, the latter “co ’ is irrelevant since VW had no opportunity to buy E March dollars at the January lOth spot rate of $0.8947/6. By not hedging, VW would have paid an extra 629,434.76 for the $7,000,000 to satisfy its dollar liability, the difference between the cost of $7 million with hedging (€ 7,790,046.92) and the cost without hedging (9,819,481,458). ...
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Econ+161B++sample+midterm++2 - Econ 161B Midterm Exam II...

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