Reference no: EM133065682

Problem 1: Refer to the data in the iPod index in Table 6.1 on page 165 to answer the following:
a Given the current exchange rate of 6.8365 renminbi per US dollar what must be the new value of the RMB per US dollar so that iPods cost the same US dollar equivalent price in China as they can be purchased for in the United States(USD149)?

b The Apple iPod nano MP3 player is manufactured in China and it retails in that country for 1198 renminbi (Chinese yuan) or just over USD175. However, in the United States, the same device can be purchased for USD149. Explain why the significant difference in prices.

c In Australia the list price of an Apple iPod nano 8GB MP3 player hasn't changed for 17 months despite the Aussie dollar strengthening by around 30% over that time. Who benefits from this and why don't Australians simply buy the device online from overseas and pocket the profits which retail stores make from the stronger Aussie dollar?

Problem 2: XTerra exports and pass-through. Assume that the export price of a Nissan XTerra from Osaka, Japan, is Y2 800000. The exchange rate is Y110.60/USD. The forecast rate of inflation in the United States is 2% per year and in Japan, 0% per year.
a What is the export price of the XTerra at the beginning of the year, expressed in US dollars?
b Assuming that purchasing power parity holds, what should the exchange rate be at the end of the year?
c Assuming 100% pass-through of exchange rate changes, what should be the US dollar price of an XTerra at the end of the year?
d Assuming 70% pass-through of exchange rate changes, what should the price of an XTerra be at the end of the year?

Problem 3: Argentine peso and PPP. The Argentine peso was fixed through a currency board at Ps1.00/
USD throughout the 1990s. In January 2002 the Argentine peso was floated. On 29 January 2003 it was trading at Ps3.20/USD. During that one-year period, Argentina's inflation rate was 20% on an annualised basis. Inflation in the United States during that same period was 2.2% annualised.
a What should have been the exchange rate in January 2003 if purchasing power parity held?
b By what percentage was the Argentine peso undervalued on an annualised basis?
c What were the probable causes of undervaluation?

Problem 4: AS/Euro international Fisher effect. Assume that one-year interest rates are 4.40% in Australia
and 3.75% in the euro-zone. The spot rate between the euro and the Australian dollar is €0.8250/A$. Assuming that the international Fisher effect holds, what should the VAS exchange rate be one year hence?

Problem 5: Danish CIA (A). Steve Shi, a foreign exchange trader at JPMorgan Chase, can invest A$5 million or the foreign currency equivalent of the bank's short-term funds in a covered interest arbitrage with Denmark. Using the following quotes, can Steve Shi make a covered interest arbitrage (CIA) profit?

Spot exchange rate:                Skr6.1720/A$

3-month forward rate:              Skr7.1980/AS

3-month dollar interest:            3.0% per year (0.75% for 90 days)

3-month krone interest:            5.0% per year (1.25% for 90 days)

Problem 6: Danish CIA (B). Steve Shi is now evaluating the arbitrage profit potential in the same market after interest rates change.

a Assume that interest rates in Australia increase to 4% per year (1% for 90 days), but that all other rates remain the same. Can Steve Shi make a 90-day covered interest arbitrage profit?

b Assume that Danish kroner interest rates increase to 6% per year (1.5% for 90 days), but that all other rates remain the same, including the original Australian interest rate of 3% per year. Calculate whether Steve Shi could make a 90-day covered interest arbitrage profit.

Problem 7: Toshi Numata-CIA Japan. Toshi Numata, a foreign exchange trader at Credit Suisse First Boston's office in Tokyo, wants to invest A$2 000000 or its yen equivalent in a covered interest arbitrage between AS and Japanese yen. He faces the following exchange rate and interest rate quotes:
Spot exchange rate:                 ¥ 10.20/A$
180-day forward exchange rate: ¥ 109.80/A$
180-day dollar interest rate: 3.000% per year
180-day yen interest rate: 1.800% per year

The bank does not calculate transaction costs on any individual transaction, because these costs are part of the overall operating budget of the arbitrage department. Explain and diagram the specific steps Toshi Numata must take to make a covered interest arbitrage profit.

Problem 8: Toshi Numata-UlA Japan. Toshi Numata (CSFB Tokyo) observes that the WAS spot rate has been holding steady and that both dollar and yen interest rates have remained relatively fixed over the past week. Toshi Numata wonders if he should try an uncovered interest arbitrage (UIA) transaction and thereby save the cost of forward cover. Many of Toshi's research associates-and their computer models-are predicting the spot rate to remain close to V110.00/AS for the coming 180 days. Using the same data as in the previous problem, analyse the UlA potential.

a Calculate how much profit Toshi Numata could make if his expectations prove correct.
b What is the risk he is taking? What if the spot rate in 180 days is V106.00/A$?

Problem 9: Japanese-US parity conditions. Use the following data to diagram and calculate whether international parity conditions hold between Japan and Australia. What is the forecasted change in the Japanese yen/Australian dollar exchange rate one year hence?
Forecast annual rate of inflation for Japan: 1.00%
Forecast annual rate of inflation for Australia: 5.00%
One-year interest rate for Japan:                 4.00%
One-year interest rate for Australia: 8.00%
Spot rate:                          ¥ 04.00/A$
One-year forward rate: ¥100.00/A$