Câu 5: Assume That The Polish Currency (Called Zloty) Is Worth $.32. The U.S. Dollar Is

Câu 5 : Assume that the Polish currency (called zloty) is worth $.32. The U.S.
dollar is
worth .7 euros. A U.S. dollar can be exchanged for 8 Mexican pesos. Last year a dollar
was valued at 2.9 Polish zloty, and the peso was valued at $.10.
a. Would U.S. exporters to Mexico that accept pesos as payment be favorably or

unfavorably affected by the change in the Mexican peso’s value over the last year?
b. Would U.S. importers from Poland that pay for imports in zloty be favorably or
unfavorably affected by the change in the zloty’s value over the last year?
c. What is the percentage change in the cross exchange rate of the peso in zloty over the
last year? How would firms in Mexico that sell products to Poland denominated in zloty be
affected by the change in the cross exchange rate?
ANSWER:
a. The peso is valued at $0.125 today. Because the peso appreciated, the U.S. export-ers
are favorably affected.
b. The zloty was worth about $0.345 last year. Because the zloty depreciated, the U.S.
importers were favorably affected.
c. Last year, the cross exchange rate of the peso in zloty = $0.10/$0.345 = 0.2898. Today,
the cross exchange rate of the peso in zloty = $0.125/S.32 = 0.391. The percentage change
is (0.391 0.2898)/0.2898 = 34.92%.
Câu 6: Explain how each of the following conditions would be expected to affect the value
of the Mexican peso?
ANSWER:
SITUATION EXPECTED IMPACT ON THE

EXCHANGE RATE OF THE PESO
a. Mexico suddenly experiences a high Depreciate
rate of inflation.
b. Mexico’s interest rates rise, while its Appreciate
inflation is expected to remain low.
c.Mexico’s central bank intervenes in the Depreciate
foreign exchange market by purchasing
dollars with pesos.
d. Mexico imposes quotas on products Depreciate
imported from the United States
Câu 7: One year ago, you sold a put option on 100,000 euros with an expiration date of 1
year. You received a premium on the put option of $.05 per unit. The exercise price was
$1.22. Assume that 1 year ago, the spot rate of the euro was $1.20. One year ago, the 1-
year forward rate of the euro exhibited a discount of 2 percent, and the 1-year futures
price of the euro was the same as the 1-year forward rate of the euro. From 1 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?
b. One year ago, Rita sold a futures contract on 100,000 euros with a settlement date of 1
year. Determine the total dollar amount of her profit or loss?
ANSWER:
a. The spot rate depreciated from $1.20 to $1.152. You receive $.05 per unit. The buyer of
the put option exercises the option, and you buy the euros for $1.22 and sell them in the
spot market for $1.152. Your gain on the put option per unit is ($1.152 – $1.22) + $.05 = -
$.018. Total gain = -$.018 × 100,000 = -$1,800.
b. The futures rate one year ago was equal to: $1.20 × (1 .02) = $1.176. So the futures rate
is $1.176. The gain per unit is $1.176 – $1.152 = $.024 and the total gain is $.024 ×
100,000 = $2,400%
Câu 8: Assume that the Federal Reserve wants to reduce the value of the euro with
respect to the dollar. How could it attempt to use indirect intervention to achieve its goal?
What is a possible adverse effect from this type of intervention?
ANSWER: The Fed could use indirect intervention by raising U.S. interest rates so that
the United States would attract more capital flows, which would place upward pressure on
the dollar. However, the higher interest rates could make borrowing too expensive for
some firms, and would possibly reduce economic growth.
Câu 9: Assume that interest rate parity exists. The 1-year nominal interest rate in the
United States is 7 percent, while the 1-year nominal interest rate in Australia is 11
percent. The spot rate of the Australian dollar is $.60. Today, you purchase a 1-year for-
ward contract on 10 million Australian dollars. How many U.S. dollars will you need in 1
year to fulfill your forward contract?
ANSWER:
[(1.07)/(1.11)] 1 = -3,60%. So the one-year forward rate is $.60 × [1 + (–.036)] = $.5784.

You will need 10,000,000 × $.5784 = $5,784,000.
Câu 10: You go to a bank and are given these quotes:
You can buy a euro for 14 Mexican 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
You have $1,000. Can you use triangular arbitrage to generate a profit? If so, explain the
order of the transactions that you would execute and the profit that you would earn. If
you cannot earn a profit from triangular arbitrage, explain why? (
ANSWER: Yes, you can generate a profit by converting dollars to euros, and then euros
to pesos, and then pesos to dollars. First convert the information to direct quotes:
Use $1,000 to purchase euros: $1,000/$1.25 800 euros.
Convert 800 euros to buy pesos: 800 euros x 13 = 10,400 pesos.
Convert the 10,400 pesos to U.S. dollars: 10,400 × $.10 = $1,040.

There is profit of $40 on a $1,000 investment.
The alternative strategy that you could attempt is to first buy pesos:
Use $1,000 to purchase pesos: $1,000/S.11= 9,090.9 pesos
Convert 9,090.9 pesos to euros: 9,090.9/14= 649.35 euros
Convert 649.35 euros to dollars: 649.35 euros x $1.11= $720.78.
This strategy results in a loss.

Câu 5: Assume That The Polish Currency (Called Zloty) Is Worth $.32. The U.S. Dollar Is

Uploaded by

Copyright:

Available Formats

Câu 5: Assume That The Polish Currency (Called Zloty) Is Worth $.32. The U.S. Dollar Is

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Câu 5: Assume That The Polish Currency (Called Zloty) Is Worth $.32. The U.S. Dollar Is

Uploaded by

Copyright:

Available Formats

Câu 5 : Assume that the Polish currency (called zloty) is worth $.32. The U.S.

a. Would U.S. exporters to Mexico that accept pesos as payment be favorably or

of the Mexican peso?

SITUATION EXPECTED IMPACT ON THE

[(1.07)/(1.11)] 1 = -3,60%. So the one-year forward rate is $.60 × [1 + (–.036)] = $.5784.

Câu 10: You go to a bank and are given these quotes:

You can buy a euro for 14 Mexican 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

Use $1,000 to purchase euros: $1,000/$1.25 800 euros.

Convert 800 euros to buy pesos: 800 euros x 13 = 10,400 pesos.

Convert the 10,400 pesos to U.S. dollars: 10,400 × $.10 = $1,040.

Use $1,000 to purchase pesos: $1,000/S.11= 9,090.9 pesos

Convert 9,090.9 pesos to euros: 9,090.9/14= 649.35 euros

Convert 649.35 euros to dollars: 649.35 euros x $1.11= $720.78.

This strategy results in a loss.

You might also like