1 - University of Nevada, Reno | University of Nevada, Reno



Chapter 5

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|  |Problem 5.1 Brazilian real |  |

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|  |What was the percentage change in its value? | | |  |

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|  |Assumptions | |Values |  |

|  |Spot rate, Monday January 11, 1999, R$/$ | | |  |

| | | |1.21 | |

|  |Spot rate, Friday January 15, 1999, R$/$ | | |  |

| | | |1.43 | |

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|  |Calculation percentage appreciation or depreciation | | |  |

|  |Percentage change in the real versus the dollar | |–15.38% |  |

|  |Because the real fell in value: | |Depreciation |  |

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|  |Problem 5.2 Turkish lira |  |

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|  |What was the exchange rate and percent devaluations? | | |  |

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|  |Assumptions | |Values |  |

|  |Spot rate, February 20, 2001 (TL/$) | | |  |

| | | |68,000 | |

|  |Turkish government announces a devaluation of: | |–20.00% |  |

|  |Spot rate, February 24, 2001 (TL/$) | | 100,000|  |

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|  |a. What was the exchange rate after devaluation? | | |  |

|  | Spot rate after devaluation | | |  |

| | | |85,000 | |

|  | Check calculation: percentage change in values | |–20.0% |  |

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|  |b. What was percentage change after falling to TL100,000/$? | | |  |

|  | Percentage change from initial value | |–32.0% |  |

|  | Percentage change from “devalued” value | |–15.0% |  |

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|  |Problem 5.3 Mexican peso |  |

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|  |What was the percentage devaluation? | | |  |

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|  |Assumptions | |Values |  |

|  |Spot rate, December 20, 1994 (Ps/$) | | |  |

| | | |3.30 | |

|  |Spot rate, December 21, 1994 (Ps/$) | | |  |

| | | |5.50 | |

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|  |Calculation percentage of devaluation: | | |  |

|  |Percentage change in the peso versus the dollar | |–40.00% |  |

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|  |Problem 5.4 Russian ruble |  |

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|  |What was the percentage devaluation? | | |  |

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|  |Assumptions | |Values |  |

|  |Spot rate, August 7, 1998 (Rub/$) | |6.25 |  |

|  |Spot rate, September 10, 1998 (Rub/$) | |20.00 |  |

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|  |Calculation of percentage change: | | |  |

|  |Percentage change in the ruble versus the dollar | |–68.75% |  |

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|  |Problem 5.5 Thai baht |  |

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|  |What was the percentage devaluation? | | |  |

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|  |Assumptions | |Values |  |

|  |Opening spot rate, July 2, 1997 (Bt/$) | | |  |

| | | |25.00 | |

|  |Closing spot rate, July 2, 1997 (Bt/$) | | |  |

| | | |29.00 | |

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|  |Calculation of percentage change: | | |  |

|  |Percentage change in the baht versus the dollar | |–13.79% |  |

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|  |Problem 5.6 Ecuadoran sucre |  |

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|  |What was the percentage change in its value? | | |  |

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|  |Assumptions | |Values |  |

|  |Initial spot rate, 1999 (Sucre/$) | | |  |

| | | |5,000 | |

|  |Ending spot rate, 1999 (Sucre/$) | | |  |

| | | |25,000 | |

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|  |Calculation of percentage change: | | |  |

|  |Percentage change in the sucre versus the dollar | |–80.00% |  |

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|  |Problem 5.7 Forecating the Argentine peso |  |

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|  |What will be the peso’s future value in the coming weeks? | | | | |  |

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|  | | | | |“Eye-balled” |  |

|  | | |Date | |Values |  |

|  | | | February 1st (Ps/$) | |2.00 |  |

|  | | | February 28th (Ps/$) | |2.20 |  |

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|  | | | Percent change | |–9.09% |  |

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|  | | |If peso continued to fall at same rate for 1 month: |

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|  | | |March 1, 2002 (Ps/$) | | |  |

| | | | | |2.20 | |

|  | | |Percent change | |–9.09% |  |

|  | | |March 30, 2002 (Ps/$) | | |  |

| | | | | |2.42 | |

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|  |The period immediately following the peso’s devaluation was highly volatile and a period of transition. Most forecasters would view the February period |  |

|  |as a period in which the new exchange rate is beginning to “stabilize” in its trading. | | | | |  |

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|  | | |Supply | |

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|  |9. Purchasing power parity forecasts. Assuming purchasing power parity, and that the forecast of consumer price |  |

|  | increases for the coming year are correct, forecast the: | | | | | | | |  |

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|  |10. International Fisher forecasts. Asssuming International Fisher applies to the coming year, forecast the |  |

|  | following future spot exchange rates using the 2-year government bond interest rates: | | |  |

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|  |11. Implied real interest rates. If the nominal interest rate is the 2-year government bond rate, and the consumer |  |

|  | price forecast is expected inflation, calculate the following real interest rates: | | | | |  |

|  | a. Australian dollar real rate forecast for 2003: ’ (1 + nominal)/(1 + 2yr – consumer price change forecast) – 1 | |2.82% |  |

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|  | Note that none of the real interest rates calculated is larger than 1.8%. In the case of Japan, the real interest rate calculated |  |

|  | is only as large as it is because of the forecast deflation in the price level (negative change in consumer prices). In the case |  |

|  | of the United States, the real rate calculated is actually negative as a result of unusually low nominal interest rates while |  |

|  | consumer prices are still seen to be rising over 2% per annum. | | | | | | | |  |

|  |12. Forecasting with real interest rates. Using the real interest rates calculated in problem 11, forecast the |  |

|  | following future spot exchange rates using real interest rate differentials: | | | | |  |

|  | a. Japanese yen/US dollar exchange rate in 1 year ’ Spot (Y/US$) ( (1 + Y-real)/(1 + US$-real) | | 108.65 |  |

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|  |13. Forward rates as forecasts. Calculate the 90-day forward rate on the following currency pairs using the |  |

|  | current spot rate and the latest 3-month money market interest rates: | | | | | |  |

|  | a. Japanese yen/US dollar 90-day forward rate ’ Spot (Y/US$) ( (1 + i-3mo-Yen ( 90/360)/(1 + i-3mo-US$ ( 90/360) | | 108.42 |  |

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|  | c. Australian dollar/US dollar 90-day forward rate ’ Spot (A$/US$) ( (1 + i-3mo-A$ ( 90/360)/(1 + i-3mo-US$ ( 90/360) | 1.4708 |  |

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|  | use it like interest differentials to forecast the future spot exchange rate, one year into the future. | |  |

|  | Australia’s Misery Index | |7.80% | | | |Forecast spot ’ Spot ( ( 1 + Misery-1)/( 1 + Misery-2) |  |

|  | Japan’s Misery Index | |

|  | spot exchange rates for the coming year. | | | | | |

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| |16. Current accounts and spot rates. Are the current account forecasts from the previous question consistent |  |

| | with the exchange rate trends shown above? | |

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| |The Australian dollar consistently strengthened against the US dollar over 2002–2003 period. The US dollar recovered some of its lost value in 2004. Although Australia and the United States have similar |  |

| |inflation rate fundamentals, the Australian economy has grown at a more rapid rate in recent years. | |

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| |17. Exchange rate trends and bounds. Use the graphs to determine trends, mean values, and upper and lower |  |

  | bounds to spot exchange rate movements. | | | | | | | | |  | |  | | | | | | | | |Upper | |Lower | | | | |  | |  | | | | |Trend | |Mean | |Bound | |Bound | | | | |  | |  | | | Yen/US$ | |US$ down | |110–115 | |135.00 | |102.50 | | | | |  | |  | | | A$/US$ | |US$ down | |1.50–1.60 | |2.00 | |1.3 | | | | |  | |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | |

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