mt2_solutions_at_the_end

mt2_solutions_at_the_end - Carnegie Mellon University...

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Unformatted text preview: Carnegie Mellon University Tepper School of Business Chris Telmer Fall 2008 Midterm Exam #2 International Finance, 70-398 • Time allowed = 60 minutes • The exam is closed-book, but students may bring one 8.5 by 11 inch sheet of paper with notes written on both sides. Old-fashioned calculators are permitted, but computers, cell phones, PDAs or any other electronic devices are not . • Show all work. Partial credit may be given for incorrect and/or incomplete answers. • There are 60 possible points on the exam: – 20 points total for question 1, 5 points for each of parts (a)–(d) – 20 points for each of questions 2 and 3 Budget your time accordingly. • Don’t forget to write your name on the front page of the examination booklet. 1 1. For each of the following statements, indicate whether the statement is true , or false and justify your answer. Unjustified responses will receive a grade of zero . Each question is worth 5 points. (a) In Barcelona a particularly good caganer — a Catalan figurine that every- one should have — sold for 2,200 Spanish pesetas (ESP) . The spot ex- change rate between the peseta and the Canadian dollar was 130 ESP/CAD. The CAD/USD spot rate was 1.10 CAD/USD. Statement : The ‘Law of One Price’ suggests that the same caganer should sell for 12 U.S. dollars, in Pittsburgh. (b) If Westinghouse borrows in Japan, at low interest rates, in order to finance the construction of a new facility in Pittsburgh, then we would call this the “corporate carry trade.” (c) You feel that, because of the ongoing financial crisis, the U.S. dollar will devalue against EUR in the future. Interest rates in the U.S. are 2% and interest rates in Europe are 4%. Statement . The anticipated USD devaluation makes the U.S. dollar “risky” and, therefore, German holders of U.S. riskfree bonds are receiving a positive risk premium. (d) During its currency board period Argentina saw its neighbor, Brazil, de- value the Brazilian real substantially. Statement . All other things held equal, the Argentinian currency board should expect to see U.S. dollars flow out of its reserve account, thereby forcing them to reduce the supply of Argentinian pesos. 2 2. (20 points, 5 for (a), 7.5 for each of (b) and (c)) Here are some index-number data for Canada and U.S. consumer price indices (CPI), and nominal and real exchange rates: Consumer Price Indices Exchange Rates (CAD/USD) Canada U.S. Nominal Real* 2007 153 x 1.2500 1.15 2008 160 y 1.3261 1.25 *The real exchange rates are “cost of U.S. goods in units of Canadian goods.” (a) The real exchange rate has gone from 1.15 to 1.25. Provide several sen- tences describing in very intuitive terms what the economic meaning of this is....
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This note was uploaded on 01/20/2012 for the course INVESTMENT 101 taught by Professor Unknown during the Spring '08 term at Carnegie Mellon.

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mt2_solutions_at_the_end - Carnegie Mellon University...

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