Economics of Money, Banking and Financial Markets 9th Edition Frederic S. Mishkin - Solutions

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Assume that the one-year U.S. interest rate is 11 percent, while the one-year interest rate in Malaysia is 40 percent. Assume that a U.S. bank is willing to purchase the currency of that country from you one year from now at a discount of 13 percent. Would covered interest arbitrage be worth
Assume that the annual U.S. interest rate is currently 8 percent and Germany’s annual interest rate is currently 9 percent. The euro’s one-year forward rate currently exhibits a discount of 2 percent.a. Does interest rate parity exist?b. Can a U.S. firm benefit from investing funds in Germany
The South African rand has a one-year forward premium of 2 percent. One-year interest rates in the United States are 3 percentage points higher than in South Africa. Based on this information, is covered interest arbitrage possible for a U.S. investor if interest rate parity holds?
Assume that annual interest rates in the United States are 4 percent, while interest rates in France are 6 percent.a. According to IRP, what should the forward rate premium or discount of the euro be?b. If the euro’s spot rate is $1.10, what should the one-year forward rate of the euro be?
The following information is available:• You have $500,000 to invest.• The current spot rate of the Moroccan dirham is $.110.• The 60-day forward rate of the Moroccan dirham is $.108.• The 60-day interest rate in the United States is 1 percent.• The 60-day interest rate in Morocco is 2
Assume that Mexico’s economy has expanded significantly, causing a high demand for loanable funds there by local firms. How might these conditions affect the forward discount of the Mexican peso?
Assume that the 30-day forward premium of the euro is -1 percent, while the 90-day forward premium of the euro is 2 percent. Explain the likely interest rate conditions that would cause these premiums. Does this ensure that covered interest arbitrage is worthwhile?
Describe a method for testing whether interest rate parity exists. Why are transaction costs, currency restrictions, and differential tax laws important when evaluating whether covered interest arbitrage can be beneficial?
Before the Asian crisis began, Asian central banks were maintaining a somewhat stable value for their respective currencies. Nevertheless, the forward rate of Southeast Asian currencies exhibited a discount. Explain.
Assume that interest rate parity holds. At the beginning of the month, the spot rate of the Canadian dollar is $.70, while the one-year forward rate is $.68. Assume that U.S. interest rates increase steadily over the month. At the end of the month, the one-year forward rate is higher than it was at
The interest rate in Indonesia is commonly higher than the interest rate in the United States, which reflects a high expected rate of inflation there. Why should Nike consider hedging its future remittances from Indonesia to the U.S. parent even when the forward discount on the currency (rupiah) is
At the end of this month, you (owner of a U.S. firm) are meeting with a Japanese firm to which you will try to sell supplies. If you receive an order from that firm, you will obtain a forward contract to hedge the future receivables in yen. As of this morning, the forward rate of the yen and spot
The one-year interest rate in Singapore is 11 percent. The one-year interest rate in the United States is 6 percent. The spot rate of the Singapore dollar (S$) is $.50 and the forward rate of the S$ is $.46. Assume zero transaction costs. a. Does interest rate parity exist?b. Can a U.S. firm
Assume that interest rate parity exists. You expect that the one-year nominal interest rate in the United States is 7 percent, while the one-year nominal interest rate in Australia is 11 percent. The spot rate of the Australian dollar is $.60. You will need 10 million Australian dollars in one
You go to a bank and are given these quotes: You can buy a euro for 14 pesos. The bank will pay you 13 pesos for a euro. You can buy a U.S. dollar for .9 euros. The bank will pay you .8 euros for a U.S. dollar. You can buy a U.S. dollar for 10 pesos. The bank will pay you 9 pesos for a U.S. dollar.
1. The first arbitrage opportunity relates to locational arbitrage. Holt has obtained spot rate quotations from two banks in Thailand: Minzu Bank and Sobat Bank both located in Bangkok. The bid and ask prices of Thai baht for each bank are displayed in the table below:Determine whether the foreign
1. Do you think Jim will be able to find a bank that provides him with a more favorable spot rate than his local bank? Explain.2. Do you think that Jim’s bank is likely to provide more reasonable quotations for the spot rate of the British pound if it is the only bank in town that provides
Does PPP Eliminate Concerns about Long-Term Exchange Rate Risk?Point Yes. Studies have shown that exchange rate movements are related to inflation differentials in the long run. Based on PPP, the currency of a high inflation country will depreciate against the dollar. A subsidiary in that country
Explain the theory of purchasing power parity (PPP). Based on this theory, what is a general forecast of the values of currencies in countries with high inflation?
Explain the rationale of the PPP theory.
Explain how you could determine whether PPP exists. Describe a limitation in testing whether PPP holds.
Inflation differentials between the United States and other industrialized countries have typically been a few percentage points in any given year. Yet, in many years annual exchange rates between the corresponding currencies have changed by 10 percent or more. What does this information suggest
Explain why PPP does not hold.
Explain the international Fisher effect (IFE). What is the rationale for the existence of the IFE? What are the implications of the IFE for firms with excess cash that consistently invest in foreign Treasury bills? Explain why the IFE may not hold.
Assume U.S. interest rates are generally above foreign interest rates. What does this suggest about the future strength or weakness of the dollar based on the IFE? Should U.S. investors invest in foreign securities if they believe in the IFE? Should foreign investors invest in U.S. securities if
Compare and contrast interest rate parity (discussed in the previous chapter), purchasing power parity (PPP), and the international Fisher effect (IFE).
One assumption made in developing the IFE is that all investors in all countries have the same real interest rate. What does this mean?
If investors in the United States and Canada require the same real interest rate, and the nominal rate of interest is 2 percent higher in Canada, what does this imply about expectations of U.S. inflation and Canadian inflation? What do these inflationary expectations suggest about future exchange
Assume that several European countries that use the euro as their currency experience higher inflation than the United States, while two other European countries that use the euro as their currency experience lower inflation than the United States. According to PPP, how will the euro’s value
Currencies of some Latin American countries, such as Brazil and Venezuela, frequently weaken against most other currencies. What concept in this chapter explains this occurrence? Why don’t all U.S.-based MNCs use forward contracts to hedge their future remittances of funds from Latin American
Japan has typically had lower inflation than the United States. How would one expect this to affect the Japanese yen’s value? Why does this expected relationship not always occur?
Assume that the nominal interest rate in Mexico is 48 percent and the interest rate in the United States is 8 percent for one-year securities that are free from default risk. What does the IFE suggest about the differential in expected inflation in these two countries? Using this information and
Shouldn’t the IFE discourage investors from attempting to capitalize on higher foreign interest rates? Why do some investors continue to invest overseas, even when they have no other transactions overseas?
Assume that the inflation rate in Brazil is expected to increase substantially. How will this affect Brazil’s nominal interest rates and the value of its currency (called the real)? If the IFE holds, how will the nominal return to U.S. investors who invest in Brazil be affected by the higher
How is it possible for PPP to hold if the IFE does not?
Assume that the spot exchange rate of the British pound is $1.73. How will this spot rate adjust according to PPP if the United Kingdom experiences an inflation rate of 7 percent while the United States experiences an inflation rate of 2 percent?
Assume that the spot exchange rate of the Singapore dollar is $.70. The one-year interest rate is 11 percent in the United States and 7 percent in Singapore. What will the spot rate be in one year according to the IFE? What is the force that causes the spot rate to change according to the IFE?
As of today, assume the following information is available:a. Use the forward rate to forecast the percentage change in the Mexican peso over the next year.b. Use the differential in expected inflation to forecast the percentage change in the Mexican peso over the next year.c. Use the spot rate to
The opening of Russia’s market has resulted in a highly volatile Russian currency (the ruble). Russia’s inflation has commonly exceeded 20 percent per month. Russian interest rates commonly exceed 150 percent, but this is sometimes less than the annual inflation rate in Russia.a. Explain why
Before the Asian crisis, many investors attempted to capitalize on the high interest rates prevailing in the Southeast Asian countries although the level of interest rates primarily reflected expectations of inflation. Explain why investors behaved in this manner. Why does the IFE suggest that the
Given the conversion of several European currencies to the euro, explain what would cause the euro’s value to change against the dollar according to the IFE.
Beth Miller does not believe that the international Fisher effect (IFE) holds. Current one-year interest rates in Europe are 5 percent, while one year interest rates in the United States are 3 percent. Beth converts $100,000 to euros and invests them in Germany. One year later, she converts the
Assume the following information is available for the United States and Europe:a. Does IRP hold?b. According to PPP, what is the expected spot rate of the euro in one year?c. According to the IFE, what is the expected spot rate of the euro in one year?d. Reconcile your answers to parts (a) and(c).
The one-year risk-free interest rate in Mexico is 10 percent. The one-year risk-free rate in the United States is 2 percent. Assume that interest rate parity exists. The spot rate of the Mexican peso is $.14.a. What is the forward rate premium?b. What is the one-year forward rate of the peso?c.
How could you use regression analysis to determine whether the relationship specified by PPP exists on average? Specify the model, and describe how you would assess the regression results to determine if there is a significant difference from the relationship suggested by PPP.
Describe a statistical test for the IFE.
Would PPP be more likely to hold between the United States and Hungary if trade barriers were completely removed and if Hungary’s currency were allowed to float without any government intervention? Would the IFE be more likely to hold between the United States and Hungary if trade barriers were
Assume that the inflation rates of the countries that use the euro are very low, while other European countries that have their own currencies experience high inflation. Explain how and why the euro’s value could be expected to change against these currencies according to the PPP theory.
Assume that Mexico has a one-year interest rate that is higher than the U.S. one-year interest rate. Assume that you believe in the international Fisher effect (IFE) and interest rate parity. Assume zero transaction costs. Ed is based in the United States and attempts to speculate by purchasing
Assume that locational arbitrage ensures that spot exchange rates are properly aligned. Also assume that you believe in purchasing power parity. The spot rate of the British pound is $1.80. The spot rate of the Swiss franc is 0.3 pounds. You expect that the one-year inflation rate is 7 percent in
You believe that interest rate parity and the international Fisher effect hold. Assume that the U.S. interest rate is presently much higher than the New Zealand interest rate. You have receivables of 1 million New Zealand dollars that you will receive in one year. You could hedge the receivables
The U.S. 3-month interest rate (unannualized) is 1 percent. The Canadian 3-month interest rate (unannualized) is 4 percent. Interest rate parity exists. The expected inflation over this period is 5 percent in the United States and 2 percent in Canada. A call option with a 3-month expiration date on
Today’s spot rate of the Mexican peso is $.10. Assume that purchasing power parity holds. The U.S. inflation rate over this year is expected to be 7 percent, while the Mexican inflation over this year is expected to be 3 percent. Wake Forest Co. plans to import from Mexico and will need 20
The Argentine one-year CD (deposit) rate is 13 percent, while the Mexico one-year CD rate is 11 percent and the U.S. one-year CD rate is 6 percent. All CDs have zero default risk. Interest rate parity holds, and you believe that the international Fisher effect holds.Jamie (based in the United
The United States and the country of Rueland have the same real interest rate of 3 percent. The expected inflation over the next year is 6 percent in the United States versus 21 percent in Rueland. Interest rate parity exists. The one-year currency futures contract on Rueland’s currency (called
1. What is the relationship between the exchange rates and relative inflation levels of the two countries? How will this relationship affect Blades’ Thai revenue and costs given that the baht is freely floating? What is the net effect of this relationship on Blades?2. What are some of the factors
1. Is Jim’s interpretation of the IFE theory correct?2. If you were in Jim’s position, would you spend time trying to decide whether to hedge the receivables each month, or do you believe that the results would be the same (on average) whether you hedged or not?Every month, the Sports Exports
As an employee of the foreign exchange department for a large company, you have been given the following information:Beginning of YearSpot rate of £ = $1.596Spot rate of Australian dollar (A$) = $.70Cross exchange rate: £1 = A$2.28One-year forward rate of A$ = $.71One-year forward rate of £ =
Using the information in question 1, determine whether covered interest arbitrage is feasible and, if so, how it should be conducted to make a profit.
Based on the information in question 1 for the beginning of the year, use the international Fisher effect (IFE) theory to forecast the annual percentage change in the British pound’s value over the year.
Assume that at the beginning of the year, the pound’s value is in equilibrium. Assume that over the year the British inflation rate is 6 percent, while the U.S. inflation rate is 4 percent. Assume that any change in the pound’s value due to the inflation differential has occurred by the end of
What is the difference between the spot, forward, and swap markets? Illustrate each description with an example.
What do current, historical, and average exchange rates mean in the context of foreign currency translation? Which of these rates give rise to translation gains and losses? Which do not?
A foreign currency transaction can be denominated in one currency, yet measured in another. Explain the difference between these two terms using the case of a Canadian dollar borrowing on the part of a Mexican affiliate of a U.S. parent company that designates the U.S. dollar as the functional
What is the difference between a transaction gain or loss and a translation gain or loss?
Briefly explain the nature of foreign currency translation as(a) A restatement process and (b) A remeasurement process.
Compare and contrast features of the major foreign currency translation methods introduced in this chapter. Which method do you think is best? Why?
Under what set of conditions would the temporal method of currency translation be appropriate. Under what set of conditions would the current rate method be appropriate?
What lessons, if any, can be learned from examining the history of foreign currency translation in the United States?
In what way is foreign currency translation tied to foreign inflation?
How does the treatment of translation gains and losses differ between the current and temporal translation methods under FAS No.52, and what is the rationale for the differing accounting treatments?
Assume that your Japanese affiliate reports sales revenue of 250,000,000 yen. Referring to Exhibit 6-1, translate this revenue figure to U.S. dollars using the direct bid spot rate. Do the same using the indirect spot quote.
On April 1, A. C. Corporation, a calendar-year U.S. electronics manufacturer, buys 32.5 million yen worth of computer chips from the Hidachi Company paying 10 percent down, the balance to be paid in 3 months. Interest at 8 percent per annum is payable on the unpaid foreign currency balance. The
On January 1, the wholly-owned Mexican affiliate of a Canadian parent company acquired an inventory of computer hard drives for its assembly operation. The cost incurred was 15,000,000 pesos when the exchange rate was MXN11.3 = C$1. By yearend, the Mexican affiliate had used three-fourths of the
U.S. Multinational Corporation’s subsidiary in Bangkok has on its books fixed assets valued at 7,500,000 baht. One-third of the assets were acquired two years ago when the exchange rate was THB40 = $1. The other fixed assets were acquired last year when the exchange rate was THB38 = $1. Each
Sydney Corporation, an Australian-based multinational, borrowed 10,000,000 euros from a German lender at the beginning of the calendar year when the exchange rate was EUR.60 = AUD1. Before repaying this oneyear loan, Sydney Corporation learns that the Australian dollar has depreciated to EUR.55 =
Shanghai Corporation, the Chinese affiliate of a U.S. manufacturer, has the balance sheet shown below. The current exchange rate is $.0.15 = CNY1.Required:a. Translate the Chinese dollar balance sheet of Shanghai Corporation into U.S. dollars at the current exchange rate of $.0.15 12 = CNY1. All
Use the information provided in Exercise 6.Required:a. What would be the translation effect if Shanghai Corporation’s balance sheet were translated by the temporal method assuming the Chinese yuan appreciates by 25 percent? By the current rate method?b. If the Chinese yuan depreciates by 25
Company A is headquartered in Country A and reports in the currency unit of Country A, the Apeso. Company B is headquartered in Country B and reports in the currency unit of Country B, the Bol. Company A and B hold identical assets, Apeso100 and Bol100, at the beginning and end of the year. At the
A 100 percent–owned foreign subsidiary’s trial balance consists of the accounts listed as follows. Which exchange rate—current, historical, or average—would be used to translate these accounts to parent currency assuming that the foreign currency is the functional currency? Which rates
On December 15, MSC Corporation acquires its first foreign affiliate by acquiring 100 percent of the net assets of the Armaselah Oil Company based in Saudi Arabia for 930,000,000 Saudi Arabian riyals.(SAR). At the time, the exchange rate was $1.00 = SAR3.750. The acquisition price is traceable to
Regents Corporation is a recently acquired U.S. manufacturing subsidiary located on the outskirts of London. Its products are marketed principally in the United Kingdom with sales invoiced in pounds and prices determined by local competitive conditions. Expenses (labor, materials, and other
Based on the arguments presented, what do you think should be the functional currency in this case? MINI CASE The Offshore Investment Fund (OIF) was incorporated in Fairfield, Connecticut, for the sole purpose of allowing U.S. shareholders to invest in Spanish securities. The
If history repeats itself and we see a decline in the rate of money growth, what might you expect to happen to?a. Real output?b. The inflation rate?c. Interest rates?
When interest rates fall, how might you change your economic behavior?
Is everybody worse off when interest rates rise?
What is the basic activity of banks?
What are financial markets important to the health of the economy?
What is the typical relationship between interest rates on three-month Treasury bills, long-term Treasury bonds, and Baa corporate bonds?
What effect might a fall in stock prices have on business investment?
What effect might a rise in stock prices have on consumers’ decisions to spend?
How does a fall in the value of the pound sterling affect British consumers?
How does an increase in the value of the pound sterling affect American businesses?
Looking at Figure in which years would your have chosen to visit the Grand Canyon in Arizona rather than the Tower of London?
When the dollar is worth more in relation to currencies of other countries, are you more likely to buy American-made or foreign-made jeans? Are U.S companies that manufacture jeans happier when the dollar is strong or when it is weak? What about an American company that is in the business of
Why is a share of Microsoft common stock an asset for its owner and a liability for Microsoft?
If I can buy a car today for $5,000 and it is worth $10,000 in extra income next year to me because it enables me to get a job as a traveling anvil seller, should I take out a loan from Larry the Loan Shark at a 90% interest rate if no one else will give me a loan? Will I be better or worse off as
Some economists suspect that one of the reasons that economies in developing countries grow so slowly is that they do not have well-developed financial markets. Does this argument make sense?
The U.S economy borrowed heavily from the British in the nineteenth century to build a railroad system. What was the principal debt instrument used? Why did this make both countries better off?
Because corporations do not actually raise any funds in secondary markets, they are less important to the economy than primary market. Comment.

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Economics of Money, Banking and Financial Markets 9th Edition Frederic S. Mishkin - Solutions

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