Consider the following basket of goods, priced in U.S.A dollars and Japanese Yens, respectively. Suppose the following table represents the typical consumption basket of a U.S. or a Japanese citizen.

 

Quantity	P ($)		P ()
500 lbs. Wheat:	$ 19		1,950
30 lbs. Rice: 200gallonsofUnleaded Gasoline:	$ 8 $6		1,700 11,000
1VCRRecorder:	$189		17,000
1 TV:	$ 620		19,300
100 Cans of Soda	$ 3.4		7,200
20 Cheeseburgers:	$ 8.25		4,800

a. if these market basket are truly representative, then find the equilibrium random exchange rate ($/) using the Absolute Purchasing Power Parity Theorem.

b. Use the bundle of Gasoline and Rice prove the Law of One Price.

c. Do we have deviations from the Law of One Price?

d. Stateanddiscuss theAbsolutePurchasingPowerParityCondition. Why do we have violations from the APPP?

Q2 (10marks)

2. State and discuss in detail (1.) The Closed Economy Equilibrium Conditionand(2.)TheOpenEconomyEquilibriumCondition.Whatare the equilibrium conditions for Private SavingsSP and Private Investment IPinboth cases?
4. State and discuss the Law of One Price.
6. Stateanddiscuss theRelativePurchasingPowerParity Theorem.
8. State and discuss the International Fisherian Equation.
10. What are the Laspeyer's Indices?

Q3 (10marks)

ThePresident ofthe"OMICRON"FOREXBankisofferingyouthe FinancialAnalystposition becauseheadmires yourknowledgeand your character.TheOmicronForexBankiscelebratingits100 YearDay Anniversaryandaroundyouexistacrowdofimportant InvestmentandForexBankersthataskyouquestionsregarding the ForwardPremiumand Forward Discount, Inflation and the Direct and

IndirectExchangeRatesrespectively.TheHomeCountry isU.S.Aandthe Host Country is Canada.

1. Given that theSpot ExchangeRateis1USAisequalto1.35Canadian dollar and the nominal interest rates in U.S.A and Canada are4% and 5% respectively, calculate the five-year Forwards Exchange Rates.

(2.)What are the Direct and Indirect Exchange Rates?

(3.)CalculatetheForwardPremium andForwardDiscount forthese particular currencies.

(4.)What is a Zero-Sum Game?

(5.)Support youranswersfortheInflationbywell-drawn diagrams.

Q4 (20 marks)

Leonidas is currently working as a FOREXspecialist atthe"Poseidon Forex Bank" in San Francisco. He currently holds a Master's degree in Financial Economics from the "RINKY-DINKY" University and he is supposed to deliver a lecture for the "ZZZ" Global Finance Associationatthe"Banana" StateUniversity.However,he forgottheformulae and cannot compute the ICAPM Model. Please assist him to compute the ICAPMgiven that the Global Risk-Free Rate=3%. Given TABLE 1 below and the following Direct Spot Exchange Rates:

1 U.S.A =1.35CAD

1 USA=0.75 BP

TABLE 1

Canada U.K U.S.A. (M) Probability

27%	25%	30%	0.24
25%	29%	36%	0.25
26%	28%	34%	0.15
24%	26%	28%	0.36

2. Given that The Home Country is U.S.A and Host Countries are Canada and U.K. respectively calculate and commentanalytically onthe Expected Returns, Variances, Risks,Betas,Covariances, Correlation Coefficients and Coefficients of Determination.
4. Do you like the ICAPM Model? What is your Investment Advice?

Answer rating: 100% (QA)

1 a To find the equilibrium exchange rate using the Absolute Purchasing Power Parity APPP theorem we ... View the full answer