Assignment:
Professionalism means . typed because it is easy to read. . you should show your calculations because your reader might need to understand how you got your answer in order to (1) make sure it is correct and (2) understand how to interpret your answer. . proofread because spelling and grammar mistakes (1) distract from your point, and reduce your credibility as an educated, intellectual person of authority. . equations are typed using an equation editor because it is very difficult to read in-line equations when fractions are compressed into one line.
1. See the exchange rate tables out in the Feb 10 newspaper. The exchange rates listed here will reflect Feb 9 currency trading. For (a) the British Pound, (b) the Euro, (c) the Japaneese Yen and (d) each country which has a currency called a "dollar" list the exchange rate and tell whether the US dollar has appreciated or depreciated since the last trading day with respect to that currency.
2. If the exchange rate (E = ¥/$) between Yen and Dollars increases then which currency is appreciating and which is depreciating?
3. One U.S. dollar is trading on the foreign exchange market for about 1.47 Chesterfield ales (the Chesterfield currency). Therefore, one Chesterfield ale would have purchased how many U.S. dollars?
4. Suppose that the Mexican Peso is trading at 10 pesos per dollar, the interest rate in the US is 5% and the interest rate in Mexico is 4%. What must happen to the exchange rate in order for the interest rate parity condition to hold?
5. Assuming the law of one price, explain what the exchange rate between U.S. dollars and yen has to be if the price of steel in Japan is 15,000 yen per ton and the price in the U.S. is $125 per ton (assume no transaction costs).
6. If the interest rate on euro-denominated assets is 7 percent and it is 5 percent on dollar-denominated assets, and if the dollar is expected to appreciate at a 4 percent rate, for Francois the Frenchman what is the expected rate of return on dollar-denominated assets?
Excel Problem: For this problem, you must calculate your answer using excel and upload the spreadsheet.
7. Suppose that the Thai Baht is trading for $0.02, inflation in the US is 3% and inflation in Thailand is 1%. What must happen to the exchange rate in order for the purchasing power parity condition to hold?
8.Background: This is a simple purchasing game. You work for a large food processing company and your goal is to purchase as much wheat as possible either on the domestic market or on the international market. Usual rules apply, 5 points for the two-thirds with the most wheat, 2 points for the bottom third.
I will divide you into two countries: Wonderland and Sunestan. The currencies for these countries are greenbacks for Wonderland and gold coins for Sunestan. You will begin with 40 from the country in which you reside.
Wheat is available for sale in each country. Wheat is exactly the same in both countries. It can be purchased for two greenbacks in Wonderland or for one gold coin in Sunestan. Wheat is available in unlimited supply at these prices. Your objective is to purchase as much wheat as possible, no matter where it comes from.
If you only want to purchase wheat in your home country, you do not need to participate in the currency market. You may simply purchase wheat using your home currency. However, if you want to purchase wheat in the other country, you first need to buy foreign currency. Wheat sellers in Wonderland accept only greenbacks, and sellers in Sunestan accept only gold coins. Dr. Fusaro is an international bank and will sell both currencies in the following manner.
Foreign Currency Market:
In order to facilitate this experiment, Dr. Fusaro will offer currency for sale.
• You may purchase currency only from Dr. Fusaro.
• Dr. Fusaro will sell currency in blocks of four. You may buy four Wonderland greenbacks or four Sunestan gold coins. Greenbacks will be offered for sale only in odd numbered rounds, and gold coins will be offered for sale only in even numbered rounds. Anyone may purchase either currency as long as you have some of the other currency. You need greenbacks to purchase gold coins and gold coins to purchase greenbacks.
• If you want to bid for a block of currency, first decide how much you want to bid and then place the appropriate number of bills in a stack against your chest. Be careful not to reveal your bid to other players. The bidding process is very important. Make sure that you fully understand it before we begin.
• When everyone is ready, Dr. Fusaro will ask each player to reveal his or her bid. The three highest bids each win one block of currency. Recall that a block of currency is four cards.
• Ties will be broken by a random process.
After each round, please record how much of each type of currency you have and how much wheat you can purchase; this will help you keep track of how you are doing. There will be several rounds.
Completing the Activity at Home:
If you are at home, you play along with us. Boys are citizens of Wonderland, girls are citizens of Sunestan. You have 40 of the appropriate currency. At each round, bid for currency if you like. If your bid is high enough, then you trade currency, if not, then you do not. As we proceed through the rounds fill out your form (spreadsheet). You will get points simply for being accurate and honest in filling out your form.