Multinational Financial Management

Debt Default

1. In the Debt Default model, suppose that Ybar= 1000, V= 500, c=110 and r*= .1. What is the threshold value of income below which the country will default, as a function of loan size, L?
2. Numbers are same as in a). What is the largest loan size L that the country can take out and have a positive probability of paying back? At what level of L will the country always pay back?
3. In the Debt Default model illustrate with the two graphs with probability of default as a function of loan size and the supply/demand for loans what happens if the VOLATILITY of a countrys output goes up.

2) Wealth and external wealth

a) What are three ways to get wealthy? (In words or in math)

b) In the context of International Finance, what is meant by the phrase manna from heaven?

c) In the context of International Finance, what is meant by the phrase exorbitant privilege?

d) In the context of International Finance, what is meant by the phrase original sin?