Ex6_RPPP, CIA, FX rate pass-through

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Jan 9, 2024

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Problem 6.1 Malaysian Island Resort a. How many dollars might Theresa expect to need one year hence to pay for her 30-da b. By what percent has the dollar cost gone up? Why? Assumptions Charge for suite plus meals in Malaysian ringgit (RM) per day Spot exchange rate (RM/$) US$ cost today for a 30 day stay Malaysian ringgit inflation rate expected to be U.S. dollar inflation rate expected to be a. How many dollars might you expecte to need one year hence for your 30-day va Spot exchange rate (ringgit per US$) Malaysian ringgit inflation rate expected to be U.S. dollar inflation rate expected to be Spot (expected in 1 year) = Spot x ( 1 + RM inflation) / ( 1 + US inflation) Expected spot rate one year from now based on PPP (RM/$) Hotel charges expected to be paid one year from now for a 30-day stay (RM) US dollars needed on the basis of these two expectations: b. By what percent has the dollar cost gone up? Why? New dollar cost Original dollar cost Percent change in US$ cost Theresa Nunn is planning a 30-day vacation on Pulau Penang, Malaysia, one year from for a luxury suite plus meals in Malaysian ringgit (RM) is RM1,045/day. The Malaysian at RM3.1350/$. She figures out the dollar cost today for a 30-day stay would be $10,00 her that any increase in its room charges will be limited to any increase in the Malaysia Malaysian inflation is expected to be 2.75% per annum, while U.S. inflation is expected

ay vacation? Value 1,045.00 3.1350 2.750% 1.250% acation? 3.1350 2.750% 1.250% 3.1814 32,212.13 $10,125.00 $10,125.00 $1,000.00 912.500% m now. The present charge n ringgit presently trades 00. The hotel informed an cost of living. d to be only 1.25%.

Problem 6.12 Casper Landsten -- CIA (A) Assumptions Value Arbitrage funds available $1,000,000 Spot exchange rate (SFr./$) 1.2810 3-month forward rate (SFr./$) 1.2740 U.S. dollar 3-month interest rate 4.800% annualized rate !!! Swiss franc3-month interest rate 3.200% annualized rate !!! Difference in interest rates ( i SFr. - i $) -1.600% Forward premium on the Swiss franc 2.198% CIA profit potential 0.598% U.S. dollar interest rate (3-month) START 4.800% $ 1,000,000.00 → → 1.0120 → → ↓ ↓ ↓ ↓ ↓ Spot (SFr./$) ---------------> 90 days ----------------> 1.2810 ↓ ↓ ↓ SFr. 1,281,000.00 → → 1.0080 → → 3.200% Swiss franc interest rate (3-month) Casper Landsten is a foreign exchange trader for a bank in New York. He has $1 million (or its Swis short term money market investment and wonders if he should invest in U.S. dollars for three month arbitrage investment in the Swiss franc. He faces the following quotes: Arbitrage Rule of Thumb: If the difference in interest rates is greater than the forward premium/disc the spot rate for UIA, invest in the higher interest yielding currency. If the difference in interest rates premium (or expected change in the spot rate), invest in the lower yielding currency. This tells Casper Landsten he should borrow U.S. dollars and invest in the LOWER yielding currenc to earn covered interest arbitrage (CIA) profits. Casper Landsten makes a net profit, a covered interest arbitrage profit, of $1,538.46 on each million market (by going around the box). He should therefore take advantage of it and perform covered inte

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SFr. Equivalent SFr. 1,281,000 END $ 1,012,000.00 1,013,538.46 -$ 1,538.46 ↑ ↑ ↑ Forward-90 (SFr./$) 1.2740 ↑ ↑ ↑ SFr. 1,291,248.00 ss franc equivalent) for a hs, or make a covered interest count, or expected change in s is less than the forward cy, the Swiss franc, in order he invests in the Swiss franc erest arbitrage.

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Problem 6.7 Kamada: CIA Japan (A) Assumptions Value Arbitrage funds available $5,000,000 Spot rate (¥/$) 118.60 180-day forward rate (¥/$) 117.80 117.7893 180-day U.S. dollar interest rate 4.800% annualized rate !!! 180-day Japanese yen interest rate 3.400% annualized rate !!! Difference in interest rates ( i ¥ - i $) -1.400% Forward premium on the yen 1.358% CIA profit potential -0.042% U.S. dollar interest rate (180 days) 4.800% $ 5,000,000 → → 1.0240 → → ↑ ↑ ↑ ↑ ↑ Spot (¥/$) ---------------> 180 days ----------------> 118.60 ↑ ↑ ↑ 593,000,000.00 → → 1.0170 → → Japanese yen 3.400% START Japanese yen interest rate (180 days) Takeshi Kamada, a foreign exchange trader at Credit Suisse (Tokyo), is exploring covered interest arbit to invest $5,000,000 or its yen equivalent, in a covered interest arbitrage between U.S. dollars and Japan following exchange rate and interest rate quotes. Arbitrage Rule of Thumb: If the difference in interest rates is greater than the forward premium/discou spot rate for UIA, invest in the higher interest yielding currency. If the difference in interest rates is less (or expected change in the spot rate), invest in the lower yielding currency. This tells Takeshi Kamada that he should borrow yen and invest in the higher yielding currency, the U.S covered interest arbitrage (CIA) profit. Takeshi Kamada generates a CIA profit by investing in the higher interest rate currency, the dollar, and dollar proceeds forward into yen at a forward premium which does not completely negate the interest di

Yen Equivalent 593,000,000 $ 5,120,000 ↓ ↓ ↓ ↓ ↓ Forward-180 (¥/$) 117.80 ↓ ↓ 603,136,000 603,081,000 55,000 END trage possibilities. He wants nese yen. He faced the unt, or expected change in the s than the forward premium S. dollar, to lock-in a d simultaneously selling the ifferential.

Problem 6.6 Toyota's Pass-Through a. What was the export price for the Corolla at the beginnin b. Assuming purchasing power parity holds, what should th c. Assuming 100% pass-through of exchange rate, what wi d. Assuming 75% pass-through, what will the dollar price o Steps Initial spot exchange rate (¥/$) Initial price of a Toyota Corolla (¥) Expected US dollar inflation rate for the coming year Expected Japanese yen inflation rate for the coming year Desired rate of pass through by Toyota a. What was the export price for the Corolla at the begin Year-beginning price of an Corolla (¥) Spot exchange rate (¥/$) Year-beginning price of a Corolla ($) b. What is the expected spot rate at the end of the year a Initial spot rate (¥/$) Expected US$ inflation Expected Japanese yen inflation Expected spot rate at end of year assuming PPP (¥/$) c. Assuming complete pass through, what will the price Price of Corolla at beginning of year (¥) Japanese yen inflation over the year Price of Corolla at end of year (¥) Expected spot rate one year from now assuming PPP Price of Corolla at end of year in ($) d. Assuming partial pass through, what will the price b Assume that the export price of a Toyota Corolla from Osak rate of inflation in the United States is 2.2% per year and is questions on exchange rate pass through.

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Price of Corolla at end of year (¥) Amount of expected exchange rate change, in percent (f Proportion of exchange rate change passed through b Proportional percentage change Effective exchange rate used by Toyota to price in US$ Price of Toyota at end of year ($)

ng of the year expressed in U.S. dollars? he exchange rate be at the end of the year? ill the dollar price of a Corolla be at the end of the year? of a Corolla be at the end of the year? Value 87.60 2,150,000 2.200% 0.000% 75.000% nning of the year? 2,150,000 87.60 $ 24,543.38 assuming PPP? 87.60 2.20% 0.00% ) 85.71 e be in US$ in one year? 2,150,000 0.000% 2,150,000 P (¥/$) 85.71 $ 25,083.33 be in US$ in one year? ka, Japan is ¥2,150,000. The exchange rate is ¥87.60/$. The forecast s 0.0% per year in Japan. Use this data to answer the following