17. Consider two exchange rates X/Y and Z/Y. (For example EUR/USD and JPY/USD.) They both follow perfectly correlated geometric Brownian motions with parameters (1,01) and (μ2, 02). (a) The cross-exchange rate X/Z (for example EUR/JPY) follows a standard Brownian motion (b) The cross-exchange rate X/Z (for example EUR/JPY) follows a general Brownian motion (c) The cross-exchange rate X/Z (for example EUR/JPY) follows a geometric Brownian motion (d) The cross-exchange rate X/Z (for example EUR/JPY) does not follow a geometric Brownian motion

17. Consider two exchange rates X/Y and Z/Y. (For example EUR/USD and JPY/USD.) They both follow perfectly correlated geometric Brownian motions with parameters (1,01) and (μ2, 02). (a) The cross-exchange rate X/Z (for example EUR/JPY) follows a standard Brownian motion (b) The cross-exchange rate X/Z (for example EUR/JPY) follows a general Brownian motion (c) The cross-exchange rate X/Z (for example EUR/JPY) follows a geometric Brownian motion (d) The cross-exchange rate X/Z (for example EUR/JPY) does not follow a geometric Brownian motion

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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2) Exchange rates and interest rates are connected through the parity conditions. Let the New Zealand interest rate be 5% per annum, the US interest rate be 10% per annum, the spot exchange rate be 0.8USD/1 NZD, and the one year forward exchange rate to be 0.85USD/1 NZD. a) What is the return, in NZD, a New Zealand financial trader would get if they invested 1 NZD in New Zealand? b) What is the return, in NZD, an New Zealand financial trader would get if they invested 1 NZD in the US? [Hint: you'll have to exchange that NZD for USDI] c) As you should find, the values given mean the parity condition does not hold. Given the interest rates are fixed, what will happen to the value of the spot exchange rate now? Think about this in terms of demand and supply for the NZD in the FOREX market, and you may draw out a diagram if you wish. d) Now repeat c) for the change in value of the forward exchange rate.
In answering the question, you should emphasize the line of reasoning that generated your results; it is not enough to list the results of your analysis. Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes. Assume that yesterday the exchange rate between the euro and the Singaporean dollar was 1 euro = 0.58 Singaporean dollars. Assume that today the euro is trading at 1 euro = 0.60 Singaporean dollars. %3D a. How will the change in the exchange rate affect each of the following in Singapore in the short run? i. Aggregate demand. Explain. ii. The level of employment. Explain. b. Suppose that Singapore wants to return the exchange rate to 1 euro = 0.58 Singaporean dollars. i. Should the Singaporean central bank buy or sell euros in the foreign exchange market? ii. Instead of buying or selling euros, what domestic open-market operation can the…
a) Using the following information, determine each one of the theoretical Exchange Rates (E.R.) according to International Fisher Effect. b) Show how Money Market Arbitrage could be done assuming that the loan is 1,000 units of the currency of the country where the loan is contracted. Determine the profit in the currency in which the loan was contracted. ΜARKET ΜARKET E.R. E.R. COUNTRY CURRENCY INTEREST Dec-01 Dec-02 Dec-02 Mexico MXP 12 % 19.56 20.15 Turkey TRY (Lira) 6 % 5.9419 6.07673 Australia AUD 4 % 1.7759 1.81183 Jаpan JPY 8 % 105.866 113.978 United GBP 5 % 0.5991 0.617849 Kingdom (UK) South Korea KRW (Won) 9% 1,658.62 1,793.37 Canada CAD 5 % 1.3736 1.4942 U.S.A.. USD 3%
(a) An analyst argues that exchange rate movements depend on interest rate differentials (that is, the International Fisher effect), country-specific economic policy uncertainty measures and country-specific GDP growth rates. With this in mind, the analyst estimates the following model:Expected rate of appreciation of yen against the dollar(%)= =0.5[idollar(%) – iyen(%)]+0.5[idollar(%) – iyen(%)]2+0.2[σUS(%) – σJAP(%)]++0.2[σUS(%) – σJAP(%)]2+0.1[GDPJAP(%) – GDPUS(%)].In this model, idollar(%) is the one-year interest rate in the US, iyen(%) is the one-year interest rate in Japan, σUS(%) refers to economic policy uncertainty in the US, σJAP(%) refers to economic policy uncertainty in Japan, GDPUS(%) refers toannual GDP growth in the US and GDPJAP(%) refers to annual GDP growth in Japan. Assume idollar=6%, iyen=4%, σUS=5%, σJAP=1%, GDPUS=2% and GDPJAP=1%. Calculate the expected rate of appreciation of the yen against the dollar. Explain your findings in no more than 200 words .(b) An…
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1 Suppose that due to a fall in the world interest rate, the equilibrium consumption of trad- ables, CT (r∗, QT1 , QT2 ), increases by 10 percent. Assume that prior to the fall in the world interest rate the economy was operating at full employment. Show that the equilibrium real wage also increases by 10 percent. Show that this result is independent of the exchange rate arrangement. To answer this question, you can use a graphical or a mathematical approach.
Assume that JA$ 1.00 = GUY $ 2.00. In each scenario below you are asked to find the new value of the Jamaican Dollar (JMD). You will always start a new calculation using the original exchange rate given above. Further, you are required to arrive at a possible explanation for each change and illustrate same on a diagram of the market for Jamaican Dollars. (a) The JMD depreciates by 1%. (b) The JMD depreciates by 3% (c) The JMD appreciates by 2%. (d) The JMD appreciates by 4%.
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Assume that the total value of investment transactions between the United States and Mexico is minimal. Also, assume that the total dollar value of trade transactions between these two countries is very large. Now assume that Mexico's inflation has suddenly increased, and Mexican interest rates have suddenly increased. a) Please draw a graph to show how the equilibrium value of Mexican Pesos will change. b) What's more important for Mexican Pesos given the circumstances, change in interest rates, or change in inflation in Mexico?
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At the start of 1996, the annual interest rate was 8 percent in the United States and 4.8 percent in Japan. The exchange rate was 110 yen per dollar at the time. Mr. Jorus, who is the manager of a Bermuda-based hedge fund, thought that the substantial interest advantage associated with investing in the United States relative to investing in Japan was not likely to be offset by the decline of the dollar against the yen. He thus concluded that it might be a good idea to borrow in Japan and invest in the United States. At the start of 1996, in fact, he borrowed ¥1,000 million for one year and invested in the United States. At the end of 1996, the exchange rate became 120 yen per dollar. How much profit did Mr. Jorus make in dollar terms?
Each of the governments of Brazil and Turkey has issued bonds in Brazilian real (BRL) and Turkish lira (TRY), respectively. Assume that both government securities are one-year bonds, i.e., paying the face value of the bond one year from now. Suppose that the exchange rate, E, stands at 1 Brazilian real per 0.79 Turkish lira. The following table gives face values and prices of both bonds: Face Value Price Brazil BRL 10,000 BRL 9,630 Turkey TRY 10,000 TRY 9,450 Compute the nominal interest rate on each of the bonds. Compute the expected exchange rate next year consistent with uncovered interest parity. If you expect the real to depreciate relative to the lira, which bond should you buy? Assume that you are a Brazilian investor. You exchange the reals for liras and purchase the Turkish bond. One year from now, it turns out that the exchange rate, E, is 0.75, i.e., 0.75 liras buy one real. What is your realized rate of return in reals compared to the realized rate of return…