College Bowl Round #1

Question #1 List, in order from highest to lowest trading volume, the six most widely traded currencies. List, in order from highest to lowest trading volume, the six most widely traded currencies. 1. UDS 2. EUR 3. JPY 4. GBP 5. CHF 6. CAD

Question #2 Suppose the current CAD/USD exchange rate is Suppose the current CAD/USD exchange rate is CAD/USD =.70 If the dollar experiences a 10% appreciation, what is the new CAD/USD exchange rate? CAD/USD = (.70)(1-.1) =.63 ($/CAD)

Question #3 Consider the following exchange rates: Consider the following exchange rates: EUR/USD = 1.50 USD/JPY = 100 EUR/JPY = 200 What would be a profitable trading strategy and what would your trading return be? (i.e. profits as a percentage of total investment)

Question #3 EUR/USD = 1.50 ($/E) USD/JPY = 100 (Y/$) EUR/JPY = 200 (Y/E) 200/100 = 2 ($/E) The Euro (In terms of $) is undervalued….sell $ and buy Euro!! $1 1/1.50 E.67.67(200) Y /100 $1.34 (A 34% Return)!! Sell $ Buy Euro Sell Euro Buy Yen Sell Yen Buy $

Question #4 Suppose that IBM invests $100M to build a new manufacturing facility in China. $80M of the supplies are purchased from the US, $10M are purchased in China while the remaining $10 are purchased in France. Suppose that IBM invests $100M to build a new manufacturing facility in China. $80M of the supplies are purchased from the US, $10M are purchased in China while the remaining $10 are purchased in France. How would this transaction be recorded in both the US and Chinese BOP accounts?

BOP (US) Current Account Exports Goods: $80M Services:ImportsGoods:Services: Net Factor Income: Net Unilateral Transfers: CA Balance: $80M Capital & Financial Account Foreign acquisition of US assets: US Treasuries: Private Securities: $20M FDI: Currency: US acquisition of foreign assets: FDI: -$100M Portfolio Investment: Official Reserve Assets Foreign acquisition of US ORA: US acquisition of foreign ORA: KFA Balance: -$80M

BOP (China) Current Account ExportsGoods:Services:Imports Goods: -$90M Services: Net Factor Income: Net Unilateral Transfers: CA Balance: -$90M Capital & Financial Account Acquisition of Foreign assets: US Treasuries: Private Securities: -$10M FDI: Currency: Foreign acquisition of Domestic assets: FDI: $100M Portfolio Investment: Official Reserve Assets Foreign acquisition of Domestic ORA: Acquisition of Foreign ORA: KFA Balance: $90M

Question #5 Suppose that US citizens invest $10M in Russian companies. Suppose that US citizens invest $10M in Russian companies. $3M is used to pay Russian workers $3M is used to pay Russian workers $2M is used to purchase supplies from Europe $2M is used to purchase supplies from Europe $3M is used to purchase US Treasury Bills $3M is used to purchase US Treasury Bills $2M is used to buy protection from the Russian Mob (who deposit the funds in a Swiss bank account) $2M is used to buy protection from the Russian Mob (who deposit the funds in a Swiss bank account) What will the Russian BOP accounts look like?

BOP (Russia) Current Account ExportsGoods:Services:Imports Goods: -$2 Services: Net Factor Income: Net Unilateral Transfers: CA Balance: -$2 Capital & Financial Account Acquisition of Foreign assets: US Treasuries: -$3M Private Securities: FDI: Currency: -$3M Foreign acquisition of Domestic assets: FDI: Portfolio Investment: $10M Official Reserve Assets Foreign acquisition of Domestic ORA: Acquisition of Foreign ORA: KFA Balance: $4M Statistical Discrepancy: $2M

Question #6 Suppose that the EUR/USD exchange rate is $1.35 per Euro. If the US price level is $112 and the European price index is E105, what is the real exchange rate between the US and Europe? Suppose that the EUR/USD exchange rate is $1.35 per Euro. If the US price level is $112 and the European price index is E105, what is the real exchange rate between the US and Europe? Real Exchange Rate = eP* P (1.35)(105) 112 ==1.27

Question #7 Suppose that the exchange rate between the US and Mexico is $0.50 per Peso. Baseballs cost $15 in the US and P 20 in Mexico. How could you make money and what would your profits be? (zero shipping costs, tariffs, etc) Suppose that the exchange rate between the US and Mexico is $0.50 per Peso. Baseballs cost $15 in the US and P 20 in Mexico. How could you make money and what would your profits be? (zero shipping costs, tariffs, etc) PPP Implied Exchange Rate = $15 P 20 =$.75 per Peso (The Peso is Undervalued) Buy in Mexico, Sell in the US: Profit = $15 – (P20)(.50) = $5

Question #8 Suppose that a steel costs $400/ton in the US and C$ 600/ton in Canada. There are no shipping costs, but the US imposes a 10% import tariff on imported steel. Within what range should the CAD/USD exchange rate fluctuate? Suppose that a steel costs $400/ton in the US and C$ 600/ton in Canada. There are no shipping costs, but the US imposes a 10% import tariff on imported steel. Within what range should the CAD/USD exchange rate fluctuate? PPP Implied Exchange Rate = $400 CD 600 =.67 Buy in US, Sell in Canada Profit = eP* - P = 0 e =.67 Buy in Canada, Sell in US Profit = P – eP*(1.10) = 0 e =.61 Exchange rate can fluctuate between.61 and.67

Question #9 US inflation has averaged 3.5% while in Denmark, the inflation rate has averaged 2%. Over the past year, the Krone has appreciated from 8K/$ to 6K/$. What has happened to the real exchange rate? Does this suggest a possible profit opportunity? US inflation has averaged 3.5% while in Denmark, the inflation rate has averaged 2%. Over the past year, the Krone has appreciated from 8K/$ to 6K/$. What has happened to the real exchange rate? Does this suggest a possible profit opportunity? % Change in Real Exchange Rate = % Change in Nominal Exchange Rate + Foreign Inflation - Domestic Inflation = 25% + 2% - 3.5% = 23.5% Real Dollar Depreciation You could potentially make money by buying in the US and selling in Denmark

Question #10 Suppose that we have the following inflation data in the US and Europe: Suppose that we have the following inflation data in the US and Europe: US Tradable Goods: 10% US Tradable Goods: 10% US Non-Tradable Goods: 15% US Non-Tradable Goods: 15% European Tradable Goods: 5% European Tradable Goods: 5% European Non-Tradable Goods: 5% European Non-Tradable Goods: 5% If price indices in both Europe and US are defined as If price indices in both Europe and US are defined as P =.5(Tradables) +.5(Non-Tradables) P =.5(Tradables) +.5(Non-Tradables) What should happen to the real and nominal exchange rates between the US and Europe?

Question #10 For Simplicity, assume that all prices are initially 1. The following year we have the following.

Question #10 The nominal exchange rate adjusts according to the law of one price (for tradables). The real exchange rate adjusts according to the following. A 5% Nominal Depreciation A 2% Real Appreciation

Lightning Round Israel Israel Australia Australia Philippines Philippines Austria Austria Iran Iran India India South Africa South Africa Sweden Sweden Thailand Thailand South Korea South Korea Name the Following Country’s currency Shekel Dollar Peso Euro Rial Rupee Rand Krona Baht Won Shilling