Exercises Tutorial 3 Fdi, Trade & Geography, 2014-2015 Course Material: Ch. 8 Essay

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Exercises Tutorial 3 FDI, Trade & Geography, 2014-2015 Course material: Ch. 8 1. Define the terms “spot exchange rate”, “forward exchange rate”, and “effective exchange rate”. 2. Suppose the exchange rates between the British Pound and various major currencies in the first and second quarter of 2012 are as follows: 1st quarter: £0.6/US$; £0.85/EUR; £0.0063/¥; £0.7/SFr. 2nd quarter: £0.65/US$; £0.82/EUR; £0.0070/¥; £0.74/SFr. Assume that the weights of the different currencies in the currency basket are as follows: US$: 30%, Euro: 30%, Japanese Yen:20%; Swiss Franc: 20%. Has the British effectively depreciated or appreciated between the first and the second quarter of 2012? 3. You are interested in buying a certain book. At Amazon-US the book costs 25$. At AmazonEurope the exact same book costs 18 Euros. Suppose the current exchange rate between the U.S. Dollar and the Euro is 0.8 Euros per Dollar. (a) Based on the information above, calculate the real exchange rate (assuming that the Euro is the home currency). What does the number you derived imply? (b) Assume that one year later the real exchange rate calculated from book prices is 0.9. Which area (U.S. or Europe) has become more competitive in the book market? 4. The current spot exchange rate between the Canadian Dollar and the Euro is Euro 0.6/CAD. The current 60-day forward exchange rate is Euro 0.65/CAD. You expect the spot exchange rate to be Euro 0.67/CAD in 60 days. How can you use a forward exchange contract to speculate? 5. Consider the following information (FF refers to French Francs): Spot exchange rate (FF/$) = 7.4825 90-day Forward Exchange Rate = 7.5250 90-day interest rate on U.S. bonds = 8.2% p.a. 90-day interest rate on French bonds = 12.7% p.a. Does covered interest rate parity hold? If not, by how much should the forward exchange rate adjust so that covered interest rate parity

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