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FIN Week 3 Homework

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Chapter 4 Homework: p. 128-132 Questions 4, 9, 16, 22 4. Income Effects on Exchange Rates. Assume that the U.S. income level rises at a much higher rate than does the Canadian income level. Other things being equal, how should this affect the (a) U.S. demand for Canadian dollars, (b) supply of Canadian dollars for sale, and (c) equilibrium value of the Canadian dollar? 9. Interaction of Exchange Rates. Assume that there are substantial capital flows among Canada, the United States, and Japan. If interest rates in Canada decline to a level below the U. S. interest rate, and inflationary expectations remain unchanged, how could this affect the value of the Canadian dollar against the U. S. dollar? How might this decline in Canada’s interest rates possibly affect the value of the Canadian dollar against the Japanese yen? 16. Economic Impact on Capital Flows. How do you think the weaker U.S. economic conditions could affect capital flows? If capital flows are affected, how would this influence the value of the dollar (holding other factors constant)? 22. Relative Importance of Factors Affecting Exchange Rate. Assume that the level of capital flows between the U.S. and the country of Krendo is negligible (close to zero) and will continue to be negligible. There is a substantial amount of trade between the U.S. and the country of Krendo and no capital flows. How will high inflation and high interest rates affect the value of the kren (Krendo’s currency)? Explain. Chapter 5 Homework: p. 159-165 Questions 7, 15, 17, 25 7. Speculating with Currency Options. When should a speculator purchase a call option on Australian dollars? When should a speculator purchase a put option on Australian dollars? 15.Speculating with Currency Futures. Assume that the euro’s spot rate has moved in cycles over time. How might you try to use futures contracts on euros to capitalize on this tendency? How could you deter¬mine whether such a strategy would have been profitable in previous periods? 17. Price Movements of Currency Futures. Assume that on November 1, the spot rate of the British pound was $1.58 and the price on a December futures contract was $1.59. Assume that the pound depreciated during November so that by November 30 it was worth $1.51. a. What do you think happened to the futures price over the month of November? Why? b. If you had known that this would occur, would you have purchased or sold a December futures contract in pounds on November 1? Explain. 25. Estimating Profits from Currency Futures and Options. One year ago, you sold a put option on 100,000 euros with an expiration date of one year. You received a premium on the put option of $.04 per unit. The exercise price was $1.22. Assume that one year ago, the spot rate of the euro was $1.20, the one-year forward rate exhibited a discount of 2%, and the one-year futures price was the same as the one-year forward rate. From one year ago to today, the euro depreciated against the dollar by 4 percent. Today the put option will be exercised (if it is feasible for the buyer to do so). a. Determine the total dollar amount of your profit or loss from your position in the put option. a. Determine the total dollar amount of your profit or loss from your position in the put option. b. Now assume that instead of taking a position in the put option one year ago, you sold a futures contract on 100,000 euros with a settlement date of one year. Determine the total dollar amount of your profit or loss.

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