Problem Set 1

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Agricultural Economics 330 Problem Set 1 1. The EUR/USD exchange rate is 1.09, and you have $1800 you need to convert into Euros. 1. How many Euros will you have? 2. What is the inverse exchange rate, aka, the USD/EUR rate? 2. The EUR/CZK (CZK is the three-letter abbreviation for the Crown, the currency of the Czech Republic) exchange rate is 24.02, and you want to convert 14,000 € Euros into Crowns. 1. How many Crowns will you have? 2. What is the inverse exchange rate, aka, the CZK/EUR rate? 3. The USD/JPY exchange rate is 146.50, and you want to buy 10,000 yen. How much money in dollars will you need? 4. You’re moving to England, and you are trying to figure out how much you can afford to pay in rent. You have a budget of $1550 per month, and the USD/GBP exchange rate is 0.844. What is the most, in pounds, that you can spend on rent in England?

5. The GBP/EUR exchange rate is 1.21, and the USD/GBP exchange rate is 0.795. You want to convert $1,800 into Euros, but you don’t know the USD/EUR rate. How many Euros will you have after converting your dollars? 6. You planned a trip to Canada three months ago, so you bought $2,500 worth of Canadian currency at the exchange rate of USD/CAD 1.388. By the time you are ready to leave, the exchange rate has changed to USD/CAD 1.426. 1. What happened to the value of the USD relative to the CAD? 2. How much money (in both USD and CAD values) did you miss out on by exchanging your dollars three months ago rather than right before your trip? 7. You invest $10,000 in a European stock at an exchange rate of USD/EUR = .88 Over one year your investment grows by 4.1% and you sell it for its value in Euros. When you are ready to convert it back into Dollars at the end of the year you realize that the dollar has strengthened against the euro, so the new rate is USD/EUR = .925 1. How much do you have in Dollars at the end of the year? 2. How much would you have had in Dollars at the end of the year if the exchange rate remained the same at USD/EUR = .88 over the course of the year?

For each of the following terms, expand upon the definitions provided in two ways. You can do so by adding a piece of information clarifying the concept, providing a real- world example of its use or function, connecting it to a topic we’ve discussed in the course, or any other relevant way. Your two answers should be different and showcase your understanding of the term. GAAP (Generally Accepted Accounting Principles): a common set of accounting rules, standards, and procedures issued by the Financial Accounting Standards Board (FASB) Depreciation: an accounting method used to allocate the cost of a physical asset over its useful life Diversification: a risk management strategy that mixes a wide variety of investments within a portfolio

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Fundamental analysis: Analysis of a security that involves reading accounting and financial information about a company to determine whether the share is overvalued or undervalued Inflation: the decline of purchasing power of a given currency over time Forex: the global electronic marketplace for trading international currencies

Written-Answer Questions: In your own words, write a few sentences for each question. There are no st rictly “right” answers, so simply show your understanding of the material and credit will be given. The older and more fundamental a company is the less its stock price tends to fluctuate. Because of this investors are less likely to want to purchase the stock if they are looking to make money from capital gains. For that reason, many of these large businesses give out strong dividends, paying out much of the cash they earn each year to their shareholders. This makes their stock attractive to value investors and large, institutional investors looking for safe, steady earnings over time. Find and name three stocks in the S&P 500 that pay out dividends and list the amounts of their most recent dividend payments. Why would you want to own stocks that pay dividends over growth- oriented stocks?

Index funds are often crafted to properly represent various batches of stocks. Some are general market index funds, which are comprised of all of the stocks in the S&P 500, so the performance of the index fund almost perfectly tracks along with the performance of the S&P overall. Others are designed to capture specific markets, such as oil and gas, home construction, agriculture, the tech sector, or healthcare. These index funds are comprised of a set of stocks meant to largely represent the biggest players within that sector. We learned that diversification can reduce unsystematic risk within a portfolio, but cannot reduce systematic risk. What is systematic risk, and what are a couple potential systematic risks for the agriculture and oil & gas sectors? Lastly, describe a potential systematic risk for the S&P 500 overall.

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