Assignment : 1
1. Elaborate on the benefits of a proactive approach to globalization and global competition.
2. What are the various ways in which domestic firms enter international markets? What are the benefits and risks of each strategy of foreign market entry?
3. In 2002 , one dollar bought ¥125. In 2006, it bought about ¥115.
a. What was the dollar value of the yen in 2002? What was the yen's dollar value in 2006?
b. By what percent has the yen risen in value between 2002 and 2006?
c. By what percent has the dollar fallen in value between 2002 and 2006?
4. On "1'1ne 14, 2001, Domingo Cavallo, Argentina's trea' ·J secretary announced a new exchange rate policy designed to stimulate Argentina's slumping economy Under the new policy, exporters and importers would be able to convert between dollars and pesos at an exchange rate that was an average of the dollar and the euro exchange rates, that is, P1 = $0.50 + €0.50. At that time, the euro was trading at $0.85.
a. How many pesos would an exporter receive for one dollar under the new system?
b. How many dollars would an importer receive for one peso under the new system?
5. The experiences of fixed exchange-rate systems and target-zone arrangements have not been entirely satisfactory.
a. ·what lessons can economists draw from the breakdown of the Bretton Woods system?
b. What lessons can economists draw from the exchange rate experiences of the EMS?
6. Gold has been called "the ultimate burglar alarm." Explain what this expression means.
7. Two countries, the United States and England, produce only one good, wheat. Suppose the price of wheat is $3.25 in the United States and is £1.35 in England.
a. According to the law of one price, what should the $:£spot exchange rate be?
b. Suppose the price of wheat over the next year is expected to rise to $3.50 in the United States and to £1.60 in England. What should the 1-year $:£ forward rate be?
c. If the U.S. government imposes a tariff of $0.50 per bushel on wheat imported from England, what is the maximum possible change in the spot exchange rate that could occur?
8. Suppose that 3-month interest rates (annualized) in japan and the United States are 7% and 9% respectively the spot rate is ¥142:$1 and the 90-day forward rate is ¥139:$1.
a. Where would you invest?
b. Where would you borrow?
c. What arbitrage opportunity do these present?
d. Assuming no transaction costs, what would be your arbitrage profit per dollar or dollar-equivalent borrowed?
9. During the year, japan had a current-account surplus of $98 billion and a financial-account deficit, aside from the change in its foreign-exchange reserves, of $67 billion.
a. Assuming the preceding data are measured with precision, what can you conclude about the change in Japan's foreign exchange reserves during the year?
b. What is the gap between japan's national expenditure and its national income?
c. What is the gap between japan's savings and its domestic investment?
d. What was Japan's net foreign investment for the year?
e. Suppose the government's budget ran a $22 billion during the year. What can you conclude about japan's private savings-investment balance for the year?
10. Suppose Dow Chemical receives quotes of $0.00824245 for the yen and $0.03023-27 for the Taiwan dollar (NT$).
a. How many U.S. dollars will Dow Chemical receive from the sale of ¥50 million?
b. What is the U.S. dollar cost to Dow Chemical of buying ¥1 billion?
c. How many NT$ will Dow Chemical receive for U.S.$500,000?
d. How many yen will Dow Chemical receive for NT$200 million?
e. What is the yen cost to Dow Chemical of buying NT$80 million?
11. As a foreign exchange trader at Sumitomo Bank, you have a customer who would like spot and 30-day forward yen quotes on Australian dollars. Current market rates are as follows:
Spot 30-day
¥121.37-85/U.S.$1 15-13
A$1.1878-98/U.S.$1 20-26
a. What bid and ask yen cross rates would you quote on spot Australian dollars?
b. What outright yen cross rates would you quote on 30-day forward Australian dollars?
c. What is the forward premium or discount on buying 30-day Australian dollars against yen delivery?
12. On january 10, Volkswagen (VW) 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 CME futures contracts. The spot rate is $1.3447/€, and the March futures price is $1.3502/€.
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 $1.3452/€, while the March futures price is $1.3468/€. Calculate VW's net euro gain or loss on its futures position. Compare this figure with VV1ts gain or loss on its unhedged position.
13. A trader executes a "bear spread" on the japanese yen consisting of a long PHLX 103 March put and a short PHLX 101 March put.
a. If the price of the 103 put is 2.81(l00th of ¢1¥), while the price of the 101 put is 1.6 (lOOth of¢!¥), what is the net cost of the bear spread?
b. What is the maximum amount the trader can make on the bear spread in the event the yen depreciates against the dollar? c. Redo your answers to Parts (a) and (b) assuming the trader executes a "bull spread" consisting of a long PHLX 97 March call priced at 1.96 (100th of ¢!¥) and a short PHLX 103 March call priced at 3.91 (100th of ¢1¥). What is the trader's maximum profit? Maximum loss?
14. Suppose that IBM would like to borrow fixed-rate yen, whereas Korea Development Bank (KDB) would like to borrow floating-rate dollars. IBM can borrow fixed-rate yen at 4.5% or floating-rate dollars at UBOR + 0.25%. KDB can borrow fixed-rate yen at 4.9% or floating-rate dollars at LlBOR + 0.8%.
a. What is the range of possible cost savings that IBM can realize through an interest rate/currency swap with KDB?
b. Assuming a notional principal equivalent to $125 million and a current exchange rate of ¥105/$, what do these possible cost savings translate into in yen terms?
c. Redo Parts (a) and (b) assuming that the parties use Bank of America, which charges a fee of 8 basis points to arrange the swap.
15. In May 1988, Walt Disney Productions sold to Japanese investors a 20-year stream of projected yen royalties from Tokyo Disneyland. The present value of that stream of royalties, discounted at 6% (the return required by the Japanese investors), was ¥93 billion. Disney took the yen proceeds from the sale, converted them to dollars, and invested the dollars in bonds yielding 10%. According to Disney's chief financial officer, Gary Wilson, "ln effect, we got money at a 6% discount rate, reinvested it at I 0%, and hedged our royalty stream against yen fluctuations-all in one transaction."
a. At the time of the sale, the exchange rate was ¥124 = $1. What dollar amount did Disney realize from the sale of its yen proceeds?
b. Demonstrate the equivalence between Walt Disney's transaction and a currency swap.
c. Comment on Gary Wilson's statement. Did Disney achieve the equivalent of a free lunch through its transaction?