Econ+161B++solution+to+midterm+II++Fall+2011

Econ+161B++solution+to+midterm+II++Fall+2011 - Econ 1618...

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Unformatted text preview: Econ 1618 Solution to Midterm ll Fall 2011 1. in January, 2011 (when SF3=$1) it was expected that by the end of 2011 the price level in the 0L. US. would have risen by 10% and in Switzerland by 5%. The real rate of interest in both countries is 4%. Project the expected SFs per $1 at the end of 20.1 Estimate the nominal interest rates in each country which makes it possible for investments in each country to earn their real rate of interest. Estimate the current one—year forward rate of SFs per 51. Compare your estimate of the current forward rate in © with your estimate of the expected futures spot in (a). Explain. X/zz‘ - 1151'.— 33.30 p e prt 1f" : .IOA‘O; g : j /+'05 feel/3 M»? i» $34? W: t’ ‘ f A ’ f f 1/’2‘ O/\’ :: lat 3‘ X 3/155 fiérz “3% i 7W £3%/ma724 (kl/:6 a/m0f7L /7‘Z jar/mg”; Mm. £0,wa mi ,3 Wilma/l whee/21‘ of film/2 g/MJL ,g/t. A.Sohrabian 2. The current spot rate for Swiss francs is SF1.5025/S. The three—month forward quote is SF1.4925/$. You believe that the spot Swiss franc in three months will be SF1.4800/S, and you have $100,000 with which to speculate for three months. illustrate two different ways of speculating, and calculate the dollar profit to be made by each method. The threeemonth rate of interest in Switzerland is 6% per year and in the United States is 12% per year. Any bank with which you conduct a forward market transaction will want 100% initial margin; you will be required to deposit the amount of any transaction in a savings account (earnings 6% in Switzerland or 12% in the United States). For each way of speculating, explain the risks involved. 6&359 levl‘éesre; 7 al wees: “6&5: if /6’e;£§o :BE’SF ff/flifflfi/j’ggoa : §l93o43 geisha skatétzr re??? a a m: we Ferww’d “fife/Ce) la 3’ w 5/}: filéfijawmkgfik ads} will, mfiéss't‘ng Yetfah élfiggogex E. £35 :: 5’; 5:32:27 :5? fig}???ng sf faint/Ms :. is is; flight M4? : a 353%; 27$ as team 2: f A 5 f i stole: gee??? gear [ fifties/s) {M M ewe” flieet We?” {are gig??? fifieiaggég’r’? fife/5 , f? y f Eewfig’ gee/2e”: [éffifwsw/é Ziggy; fig/W; fifiiolelfis’it 3. During 1995, the Mexican peso exchange rate rose from peso 5.33/5 to peso 7.64/3. At the same time, US. inflation was approximately 3% in contrast to Mexican inflation of about 48.7%. a. lf PPP held over this period, what would the peso/S exchange rate have been in 1995? b. By how much did the real value of the peso change over this period? as. eke; Jaw/fl 1d. On January 10, GE agrees to import parts worth 7 million euro from Germany. The parts will be delivered on March 4th and are payable immediately in euro. GE decides to hedge its euro payabies by entering into lMM futures contracts. The spot rate is 31.8947/euro and the March futures price is 51.9002/euro. a. Calculate the number of futures contracts that GE must buy to offset its euro exchange risk on the parts contract. b. On March 4‘“, the spot rate turns to be 31.8930/euro, while the March futures price is 51.8969/euro. Calculate GE’s net dollar gain or loss on its futures position. How much is the total cost of this hedge for GE. Do you think the hedge was an effective hedge? Explain. 62’ élzow’oa"/’Liaw :@ A~ 55% ‘24060 X l~7OoZ.:-7 1f 3.0 l, 400 ;{x \Lfihw X l~§7fi: «is 0,172, 520 / lots: met, 4%... (3,272 306) flux/ac Xl~273o .: 4:13 25 i as 1/ Med/‘44 .' ‘9’ 19'100" + 13/)00 : ...
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This note was uploaded on 12/13/2011 for the course ECON 161B taught by Professor Branch during the Fall '05 term at UC Irvine.

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Econ+161B++solution+to+midterm+II++Fall+2011 - Econ 1618...

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