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Subject: World Economic Geography ASSIGNMENT 1 Question 3: The Cairo plan called for sizeable monetary pledges from developed countries to support

1.If a country's government imposes a tariff on imported goods, that country's current account balance will
likely ____ (assuming no retaliation by other governments).
a. decrease
b. increase
c. remain unaffected
d. either A or C are possible
2. Assume that Live Co. has expected cash flows of $200,000 from domestic operations, SF200,000 from
Swiss operations, and 150,000 euros from Italian operations at the end of the year. The Swiss franc's
value and euro's value are expected to be $.83 and $1.29 respectively, at the end this year. What are
the expected dollar cash flows of Live Co?
a. $200,000
b. $559,500
c. $582,500
d. $393,500
3. Subsidiary A of Mega Corporation has net inflows in Australian dollars of A$2,000,000, while
Subsidiary B has net outflows in Australian dollars of A$1,500,000. The expected exchange rate
of the Australian dollar is $.55. What is the net inflow or outflow as measured in U.S. dollars?
a. $500,000 outflow.
b. $500,000 inflow.
c. $275,000 inflow.
d. $275,000 outflow.
4. Assume that interest rate parity holds. The U.S. five-year interest rate is 5% annualized, and the
Mexican five-year interest rate is 8% annualized. Today's spot rate of the Mexican peso is $.20.
What is the approximate five-year forecast of the peso's spot rate if the five-year forward rate is
used as a forecast?
a. $.131.
b. $.226.
c. $.262.
d. $.140.
e. $.174.
Hint: (1.05)5/(1.08)5 - 1 = -13%
5. Which of the following statements is not true?
a. Exporters may complain that they are being mistreated because the currency of their
country is too weak.
b. Outsourcing affects the balance of trade because it means that a service is purchased in
another country.
c. Sometimes, trade policies are used to punish countries for various actions.
d. Tariffs imposed by the EU have caused some friction between EU countries that
commonly import products and other EU countries.
e. All of the above are true.
6. A weak home currency may not be a perfect solution to correct a balance of trade deficit because:
a. it reduces the prices of imports paid by local companies.
b. it increases the prices of exports by local companies.
c. it prevents international trade transactions from being prearranged.
d. foreign companies may reduce the prices of their products to stay competitive.
7. Assume that a bank's bid rate on Swiss francs is $.43 and its ask rate is $.47. Its bid-ask percentage
spread is:
a. about 8.44%.
b. about 8.51%.
c. about 8.03%.
d. about 8.17%.
8. Assume the following information:
You have $1,000,000 to invest:
Current spot rate of pound = $1.30
90-day forward rate of pound = $1.28
3-month deposit rate in U.S. = 3%
3-month deposit rate in Great Britain = 4%
If you use covered interest arbitrage for a 90-day investment, what will be the amount of U.S.
dollars you will have after 90 days?
a. $1,024,000.
b. $1,030,000.
c. $1,040,000.
d. $1,034,000.
e.none of the above
9.The international Fisher effect (IFE) suggests that:
a. a home currency will depreciate if the current home interest rate exceeds the
current foreign interest rate.
b. a home currency will appreciate if the current home interest rate exceeds the
current foreign interest rate.
c. a home currency will appreciate if the current home inflation rate exceeds the
current foreign inflation rate.
d. a home currency will depreciate if the current home inflation rate exceeds the
current foreign inflation rate.
10, The value of euro was $1.30 last week. During last week the euro depreciated by 5%. What is
the value of euro today?
a. $1.365
b. $1.235
c. $1.330
d. $1.30
11. Graylon, Inc., based in Washington, exports products to a German firm and will receive payment of
€300,000 in three months. On June 1, the spot rate of the euro was $1.12, and the 3-month forward
rate was $1.10. On June 1, Graylon negotiated a forward contract with a bank to sell €300,000 forward
in three months. The spot rate of the euro on September 1 is $1.15. Graylon will receive $____ for the
euros.
a. 324,000
b. 330,000
c. 300,000
d. 330,000
12. Assume the following information:
Current spot rate of New Zealand dollar = $.41
Forecasted spot rate of New Zealand dollar 1 year from now = $.43
One-year forward rate of the New Zealand dollar = $.42
Annual interest rate on New Zealand dollars = 8%
Annual interest rate on U.S. dollars = 9%
Given the information in this question, the return from covered interest arbitrage by U.S.
investors with $500,000 to invest is ____%.
a. about 11.97
b. about 9.63
c. about 11.12
d. about 11.64
e. about 10.63
Hint: $500,000/$.41 = NZ$_______ × (1.08)
= NZ$________ × _______ = ___________
Yield =
13. Assume that the U.S. one-year interest rate is 3% and the one-year interest rate on Australian
dollars is 6%. The U.S. expected annual inflation is 5%, while the Australian inflation is expected
to be 7%. You have $100,000 to invest for one year and you believe that PPP holds. The spot
exchange rate of an Australian dollar is $0.689. What will be the yield on your investment if you
invest in the Australian market?
a. 6%
b. 3%
c. 4%
d. 2%
14. You just received a gift from a friend consisting of 1,000 Thai baht, which you would like to
exchange for Australian dollars (A$). You observe that exchange rate quotes for the baht are
currently $.023, while quotes for the Australian dollar are $.576. How many Australian dollars
should you expect to receive for your baht?
a. A$39.93.
b. A$25,043.48.
c. A$553.00.
d. none of the above
15. Assume the bid rate of an Australian dollar is $.60 while the ask rate is $.61 at Bank Q. Assume
the bid rate of an Australian dollar is $.63 while the ask rate is $.625 at Bank V. Given this
information, what would be your gain if you use $1,000,000 and execute locational arbitrage?
That is, how much will you end up with over and above the $1,000,000 you started with?
a. $32,787
b. $32,063.
c. $33,041
d. $31,444
e. $35,343
16. Assume the following information:
Current spot rate of New Zealand dollar = $.41
Forecasted spot rate of New Zealand dollar 1 year from now = $.43
One-year forward rate of the New Zealand dollar = $.42
Annual interest rate on New Zealand dollars = 8%
Annual interest rate on U.S. dollars = 9%
Given the information in this question, the return from covered interest arbitrage by U.S.
investors with $500,000 to invest is ____%.
a. about 11.97
b. about 9.63
c. about 11.12
d. about 11.64
e. about 10.63
Hint: $500,000/$.41 = NZ$1,219,512 × (1.08)
= NZ$1,317,073 × .42 = $553,171
Yield = ( ________ - $500,000)/$500,000 = ___________
17. Assume that the inflation rate in Singapore is 5%, while the inflation rate in the U.S. is 8%.
According to PPP, the Singapore dollar should ____ by ____%.
a. appreciate; 2.86
b. depreciate; 2.86
c. appreciate; 2.4
d. depreciate; 2.4
18. Carl is an option writer. In anticipation of a depreciation of the British pound from its current level of
$1.50 to $1.45, he has written a call option with an exercise price of $1.51 and a premium of
$.02. If the spot rate at the option's maturity turns out to be $1.56, what is Carl's profit or loss
per unit (assuming the buyer of the option acts rationally)?
a. -$0.01.
b. $0.01.
c. -$0.04.
d. $0.04.
e. -$0.03.
19.Your company expects to receive 5,000,000 Japanese yen 60 days from now. You decide to hedge
your position by selling Japanese yen forward. The current spot rate of the yen is $.0089, while
the forward rate is $.0095. You expect the spot rate in 60 days to be $.0090. How many dollars
will you receive for the 5,000,000 yen 60 days from now?
a. $44,500.
b. $45,000.
c. $526 million.
d. $47,500.
20. Samson Inc. needs €1,000,000 in 30 days. Samson can earn 5 percent annualized on a
German security. The current spot rate for the euro is $1.00. Samson can borrow funds in the
U.S. at an annualized interest rate of 6 percent. If Samson uses a money market hedge, how
much should it borrow in the U.S.?
a. $952,381.
b. $995,851.
c. $943,396.
d. $995,025.
21. The premium on a euro call option is $.02. The exercise price is $1.32. The break-even point is ____
for the buyer of the call, and ____ for the seller of the call. (Assume zero transactions costs and that the
buyer and seller of the put option are speculators.)
a. $1.30; $1.30
b. $1.34; $1.30
c. $1.30; $1.34
d. $1.34; $1.34
22. Dubas Co. is a U.S.-based MNC that has a subsidiary in Germany and another subsidiary in
Greece. Both subsidiaries frequently remit their earnings back to the parent company. The
German subsidiary generated a net outflow of €2,000,000 this year, while the Greek subsidiary
generated a net inflow of €1,500,000. What is the net inflow or outflow as measured in U.S.
dollars this year? The exchange rate for the euro is $1.05.
a. $3,675,000 outflow
b. $525,000 outflow
c. $525,000 inflow
d. $210,000 outflow
23. The one-year forward rate of the British pound is quoted at $1.60, and the spot rate of the British
pound is quoted at $1.63. The forward ____ is ____ percent.
a. discount; 1.9
b. discount; 1.8
c. premium; 1.9
d. premium; 1.8
24. Livingston Co. has a subsidiary in Korea. The subsidiary reinvests half of its net cash flows into
operations and remits half to the parent. Livingston's expected cash flows from domestic business are
$100,000 and the Korean subsidiary is expected to generate 100 million Korean won at the end of the
year. The expected value of won is $.0012. What are the expected dollar cash flows of Livingston Co.?
a. $100,000
b. $200,000
c. $160,000
d. $60,000
25. The value of euro was $1.30 last week. During last week the euro depreciated by 5%. What is the value
of euro today?
a. $1.365
b. $1.235
c. $1.330
d. $1.30
26. A U.S. corporation has purchased currency call options to hedge a 70,000 pound payable. The
premium is $.02 and the exercise price of the option is $.50. If the spot rate at the time of maturity is
$.65, what is the total amount paid by the corporation if it acts rationally?
a. $33,600.
b. $46,900.
c. $44,100.
d. $36,400.
Hint:
Dollars paid when exercising the option = £________ × $.50 = $35,000.
Premium paid for options = £70,000 × $.02 =
Amount of dollars paid = ____________
27. If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it will need C$200,000 in 90
days to make payment on imports from Canada, it could:
a. obtain a 90-day forward purchase contract on Canadian dollars.
b. obtain a 90-day forward sale contract on Canadian dollars.
c. purchase Canadian dollars 90 days from now at the spot rate.
d. sell Canadian dollars 90 days from now at the spot rate.
28. A Japanese yen is worth $.0080, and a Fijian dollar (F$) is worth $.5900. What is the value of the yen in
Fijian dollars (i.e., how many Fijian dollars do you need to buy a yen)?
a. 73.75.
b. 125.
c. 1.69.
d. 0.014.
e. none of the above
29. A forward contract can be used to lock in the ____ of a specified currency for a future point in
time.
a. purchase price
b. sale price
c. A or B
d. none of the above
30. The interest rate in the U.K. is 8%, while the interest rate in the U.S. is 5%. The spot rate for the
British pound is $1.50. According to the international Fisher effect (IFE), the British pound
should adjust to a new level of:
a. $1.44
b. $1.46
c. $1.42
d. $1.59
31. Assume that the U.S. one-year interest rate is 3% and the one-year interest rate on Australian
dollars is 6%. The U.S. expected annual inflation is 5%, while the Australian inflation is expected
to be 7%. You have $100,000 to invest for one year and you believe that PPP holds. The spot
exchange rate of an Australian dollar is $0.689. What will be the yield on your investment if you
invest in the Australian market?
a. 6%
b. 3%
c. 4%
d. 2%
Hint:
(1 + .05)/(1 + .07) ´ $0.689 = $0.676. ($100,000/A$0.689) ´ (1 + .06) = A$153,846 ´ $0.676 =
$104,000.
32. A share of the ADR of a Dutch firm represents one share of that firm's stock that is traded on a Dutch
stock exchange. The share price of the firm was 15 euros when the Dutch market closed. As the U.S.
market opens, the euro is worth $1.10. Thus, the price of the ADR should be ____.
a. $13.64
b. $15.00
c. $16.50
d. 16.50 euros
e. none of the above
33. A share of the ADR of a Dutch firm represents one share of that firm's stock that is traded on a Dutch
stock exchange. The share price of the firm was 15 euros when the Dutch market closed. As the U.S.
market opens, the euro is worth $1.10. Thus, the price of the ADR should be ____.
a. $13.64
b. $15.00
c. $16.50
d. 16.50 euros
e. none of the above
34. Assume the following information:
Quoted Bid Price
Quoted Ask Price
Value of an Australian dollar (A$) in $ $0.67
$0.69
Value of Mexican peso in $ $.074
$.077
Value of an Australian dollar in
Mexican pesos
8.2
8.5
Assume you have $100,000 to conduct triangular arbitrage. What will be your profit from
implementing this strategy?
a. $6,133
b. $2,368
c. $6,518
d. $13,711
35. Jensen Co. expects to pay €50,000 in one month for its imports from France. It also expects to
receive €200,000 for its exports to Belgium in one month. Jensen estimates the standard
deviation of monthly percentage changes of the euro to be 2.5 percent over the last 50 months.
Assume that these percentage changes are normally distributed. Using the value-at-risk (VAR)
method based on a 97.5% confidence level, what is the maximum one month loss in dollars if
the expected percentage change of the euro during next month is 2%? Assume that current
spot rate of the euro (before considering the maximum one-month loss) is $1.35.
a. -$4,303
b. -$7,830
c. -$5,873
d. -$1,958
Hint: Net exposure = €200,000 - €50,000 = €150,000
36. Assume that the total value of investment transactions between U.S. and Mexico is minimal. Also
assume that total dollar value of trade transactions between these two countries is very large. Now
assume that Mexico's inflation has suddenly increased, and Mexican interest rates have suddenly
increased. Overall, this would put ____ pressure on the value of Mexican peso. The inflation effect
should be ____ pronounced than the interest rate effect.
a. downward; more
b. upward; more
c. downward; less
d. upward; less
37. Any event that increases the supply of British pounds to be exchanged for U.S. dollars should result in
a(n) ____ in the value of the British pound with respect to ____, other things being equal.
a. increase; U.S. dollar
b. increase; nondollar currencies
c. decrease; nondollar currencies
d. decrease; U.S. dollar
38.Baylor Bank believes the New Zealand dollar will appreciate over the next five days from $.48 to $.50. The
following annual interest rates apply:
Currency Lending Rate Borrowing Rate
Dollars 7.10% 7.50%
New Zealand dollar (NZ$) 6.80% 7.25%
Baylor Bank has the capacity to borrow either NZ$10 million or $5 million. If Baylor Bank's forecast is
correct, what will its dollar profit be from speculation over the five-day period (assuming it does not use
any of its existing consumer deposits to capitalize on its expectations)?
a. $521,325.
b. $500,520.
c. $104,262.
d. $413,419.
e. $208,044.
Hint:
1. Borrow $5 million.
2. Convert to NZ$: $5,000,000/$.48 = NZ$ __________
3. Invest the NZ$ at an annualized rate of 6.80% over five days.
NZ$________ ´ [1 + 6.80% (5/360)]
4. Convert the NZ$ back to dollars:
5. Repay the dollars borrowed.
6. After repaying the loan, the remaining dollar profit is:
39. A firm wants to use an option to hedge 12.5 million in receivables from New Zealand firms. The
premium is $.03. The exercise price is $.55. If the option is exercised, what is the total amount of
dollars received (after accounting for the premium paid)?
a. $6,875,000.
b. $7,250,000.
c. $7,000,000.
d. $6,500,000.
e. none of the above
40. The premium on a pound put option is $.03 per unit. The exercise price is $1.60. The break-even point
is ____ for the buyer of the put, and ____ for the seller of the put. (Assume zero transactions costs and
that the buyer and seller of the put option are speculators.)
a. $1.63; $1.63
b. $1.63; $1.60
c. $1.63; $1.57
d. $1.57; $1.63
e. none of the above
41.A strong dollar is normally expected to cause:
a. high unemployment and high inflation in the U.S.
b. high unemployment and low inflation in the U.S.
c. low unemployment and low inflation in the U.S.
d. low unemployment and high inflation in the U.S.
42. Assume that interest rate parity holds. U.S. interest rate is 13% and British interest rate is 10%.
The forward rate on British pounds exhibits a ____ of ____ percent.
a. discount; 2.73
b. premium; 2.73
c. discount; 3.65
d. premium; 3.65
43. Assume that interest rate parity holds. The U.S. five-year interest rate is 5% annualized, and the
Mexican five-year interest rate is 8% annualized. Today's spot rate of the Mexican peso is $.20.
What is the approximate five-year forecast of the peso's spot rate if the five-year forward rate is
used as a forecast?
a. $.131.
b. $.226.
c. $.262.
d. $.140.
e. $.174.
44. A weak dollar is normally expected to cause:
a. high unemployment and high inflation in the U.S.
b. high unemployment and low inflation in the U.S.
c. low unemployment and low inflation in the U.S.
d. low unemployment and high inflation in the U.S.
45. Your company expects to receive 5,000,000 Japanese yen 60 days from now. You decide to hedge
your position by selling Japanese yen forward. The current spot rate of the yen is $.0089, while the
forward rate is $.0095. You expect the spot rate in 60 days to be $.0090. How many dollars will you
receive for the 5,000,000 yen 60 days from now if you sell yen forward?
a. $44,500
b. $45,000
c. $526 million
d. $47,500
e. $556 million
46. Assume U.S. and Swiss investors require a real rate of return of 3%. Assume the nominal U.S.
interest rate is 6% and the nominal Swiss rate is 4%. According to the international Fisher
effect, the franc will ____ by about ____.
a. appreciate; 3%
b. appreciate; 1%
c. depreciate; 3%
d. depreciate; 2%
e. appreciate; 2%
47. Cerra Co. expects to receive 5 million euros tomorrow as a result of selling goods to the
Netherlands. Cerra estimates the standard deviation of daily percentage changes of the euro to
be 1 percent over the last 100 days. Assume that these percentage changes are normally
distributed. Use the value-at-risk (VAR) method based on a 95% confidence level for the
following question(s).
What is the maximum one-day loss if the expected percentage change of the euro tomorrow is
0.5%?
a. -0.5%
b. -2.2%
c. -1.5%
d. -1.2%
48.According to interest rate parity (IRP):
a. the forward rate differs from the spot rate by a sufficient amount to offset the
inflation differential between two currencies.
b. the future spot rate differs from the current spot rate by a sufficient amount to
offset the interest rate differential between two currencies.
c. the future spot rate differs from the current spot rate by a sufficient amount to
offset the inflation differential between two currencies.
d. the forward rate differs from the spot rate by a sufficient amount to offset the
interest rate differential between two currencies.
49. Assume that the interest rate offered on pounds is 5% and the pound is expected to depreciate
by 1.5%. For the international Fisher effect (IFE) to hold between the U.K. and the U.S., the
U.S. interest rate should be ____.
a. 3.43%
b. 5.68%
c. 6.5%
d. 7.3%
50. On November 3rd the Federal Reserve decided to purchase $600 billion of Treasury Securities by June
2011 or $75 billion per month. Treasury bonds yields fell, stock prices rose.
What affect do you think ending these purchases in June will have on the dollar, inflation expectations,
real interest rates. What affect will this have on other currencies in general?
Subject: World Economic Geography ASSIGNMENT 1 Question 3 : The Cairo plan called for sizeable monetary pledges from developed countries to support enhanced population planning in the developing world. For the most part, those pledges have not been honored. Do you think the financial obligations assigned to donor countries are justified in light of the many other international needs and domestic concerns faced by their governments? Why or why not? The Plan of Action which arose from the 1994 International Conference on Population and Development calls for stabilizing the population of the world at 7.8 billion by the year 2050. This plan reflects the sense of urgency born of knowledge that the resources of the world are already being strained by human demands. International Conference on Population and Development held in Cairo launched a new approach to population issues and development. Cairo plan has shown a strategy reflecting the recognition that reproductive health cannot be considered integral to the larger social problems such as poverty, gender inequality and political participation. However, according to Vietnam Social Work network, ” the quality and success of population programs depends on financial resources that each country spent on this program, whereas this funding is dependent on economic conditions, culture and society for each country” Therefore, it is hard for donor countries to justify the financial obligation. Called "the Cairo Plan", the plan first discounts the term "population control" (emphasizing coercive means and quotas) and instead (for the first time) gives support for policies that give women greater control over their lives, promotes economic equality and opportunity and giving them a greater voice in reproduction decisions. The plan recognized that population growth needs a program that increases the educational, economic and political rights of women. This in turn leads women to want fewer children. It thus makes women partners in economic development. The plan assumes a tripling of the amount of money spent on population stabilization between 1994 to 2000 (from $5 to $17 billion). It expects about $5.7 billion to come from donor countries. Firstly, Cairo plan asked the world to support the encouragement of domestic and foreign capital, and other sources for this work. It also said that the senators over the world will attempt to promote enacted legislation to increase public resources for population and development in an appropriate way. However, finance is always a hard problem. No “investor” dares to give his money away for nothing; they need specific plans. In contrast, each country has different conditions about economy, culture or society, so it is not simple to make a perfect plan for every target. For examples, in Vietnam, GDP per capita reached $1,168 instead of under $1,000 because of the Target Population and Development Programs for 20years from 1990 to 2010 (according to socialwork.vn). However, while the world population increases 2.33 times in 50 years, Vietnam population increases 2.91 times. The main problem is the way to spread the contents of those programs although there are a lot of financial sources investing into them. Cairo plan also expects that countries with existing successful programs family planning, education and economic opportunities for women share their expertise. The World Bank and the U.S. Agency for International Development (A.I.D.) propose starting programs that include
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health, educational and loan programs for women. Secondly, while reproductive health is agreed by International organizations, national governments and nongovernmental organizations around the world, the content and concept of reproductive health is still very vague. The complexity of the concept is confused and difficult to apply as a basic for policy formulation, programming and planning. No appropriate plan, no way to invest money. What made this conference so special, and different, from earlier population conferences (Bucharest in 1974 and Mexico City in 1984) was that earlier conferences did not fully address the issues of gender equality, opportunity, education and political rights. To meet the challenges of the International Conference on Population and Development, it needs to concretize the concept of the reproductive health. Without specifying the concept, the integration of reproductive health needs of local policies and plans of the country will be limited. Therefore, it has to recognize that the plan is really important to support to widen the scope of the policies and programs about the population growth and explosion, and it also helps to “develop methods to meet demand and ensure the rights of birth production”. In addition, “the understanding of the concept of the reproductive health is limited because of the lack of understanding of the importance and scope of reproductive health problems”.
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This question was asked on Jan 30, 2013.

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