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Assume that you could both borrow and invest at the average interest rates prevailing in

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The following pages contain annual data on interest rates, inflation rates, and percentage change;in exchange rates (based on indirect quotes) for foreign countries, including the US, for the;period 1995 - 2007.;Each one of you is assigned to a foreign country and a six-year time period (1995-2000;or 2001-2006). Please consult the attached list to determine your assigned country and;time period.;Please use the attached sheets to answer the questions listed based on calculations using the data;for the assigned country and the US during the assigned time period.;Use geometric instead of arithmetic averages.;Use exact instead of the approximate method.;There is only one correct answer to these questions. You will be graded on whether or not;your answers are correct.;The necessary information and concepts are all from Chapter 4. I will discuss the solution;techniques to these problems only during class. I will not discuss them with anyone on an;individual basis outside the class. Please answer the following five questions;Country Australia;Consumer Price Index - (1995: 1.6) (1996: 1.8) (1997: 1.2) (1998: 0.8) (1999: 0.5) (2000: 2.0);Exchange rates- (1995: -1.3) (1996: -5.3) (1997: 5.3) (1998: 18.1) (1999: -2.4) (2000: 11.0);Short- Term Interest rates (1995: 7.7) (1996: 7.2) (1997: 5.4) (1998: 5.0) (1999: 5.0) (2000: 6.2);United States (CPI) 2.8 2.9 2.3 1.5 2.2 3.4;United States (EXCHANGE RATES) -5.6 4.5 7.7 4.8 -1.6 4.9;United States(Short-term Interest rates) 5.9 5.4 5.6 5.5 5.3 6.5;Q1. During the assigned time period;US dollar appreciated / depreciated (choose one) in real terms against the currency of foreign;country.;Q2. During the assigned period, what was the average uncovered rate of return from the US;viewpoint for the foreign country?;Q3. During the assigned period, what was the average uncovered rate of return from the foreign;country's viewpoint?;Q4. Based on your answers to questions 2 and 3, given perfect hindsight about interest rates and;exchange rate changes during the assigned time period you should have;Invested/ borrowed (choose one) in the US and invested / borrowed (choose one) in foreign;country.;Q5. Assume that you could both borrow and invest at the average interest rates prevailing in;foreign country and in the US during the assigned time period. Also assume that you have a line;of credit for one million dollars in the US or an equivalent amount in foreign country. Given;perfect hindsight about interest rates and exchange rate changes, please calculate your total;profit in dollars using uncovered interest arbitrage during the assigned time period if you;followed the strategy chosen in Q4.;Attachment Preview;HW1.pdf;Instructions for the project: FIN 4375;The following pages contain annual data on interest rates, inflation rates, and percentage change;in exchange rates (based on indirect quotes) for foreign countries, including the US, for the;period 1995 - 2007.;Each one of you is assigned to a foreign country and a six-year time period (1995-2000;or 2001-2006). Please consult the attached list to determine your assigned country and;time period.;Please use the attached sheets to answer the questions listed based on calculations using the data;for the assigned country and the US during the assigned time period.;Use geometric instead of arithmetic averages.;Use exact instead of the approximate method.;There is only one correct answer to these questions. You will be graded on whether or not;your answers are correct.;The necessary information and concepts are all from Chapter 4. I will discuss the solution;techniques to these problems only during class. I will not discuss them with anyone on an;individual basis outside the class.;Please answer the following five questions;Q1. During the assigned time period;US dollar appreciated / depreciated (choose one) in real terms against the currency of foreign;country.;Q2. During the assigned period, what was the average uncovered rate of return from the US;viewpoint for the foreign country?;Q3. During the assigned period, what was the average uncovered rate of return from the foreign;country's viewpoint?;Q4. Based on your answers to questions 2 and 3, given perfect hindsight about interest rates and;exchange rate changes during the assigned time period you should have;Invested/ borrowed (choose one) in the US and invested / borrowed (choose one) in foreign;country.;Q5. Assume that you could both borrow and invest at the average interest rates prevailing in;foreign country and in the US during the assigned time period. Also assume that you have a line;of credit for one million dollars in the US or an equivalent amount in foreign country. Given;perfect hindsight about interest rates and exchange rate changes, please calculate your total;profit in dollars using uncovered interest arbitrage during the assigned time period if you;followed the strategy chosen in Q4.

 

Paper#23177 | Written in 18-Jul-2015

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