1. College Bowl Round #2

2. Question #1 Following WWII, the international financial system was defined by the Bretton Woods system of Fixed exchange rates. Following WWII, the international financial system was defined by the Bretton Woods system of Fixed exchange rates. In what state is Bretton Woods located? In what state is Bretton Woods located? In what year did the Bretton Woods system end and why? In what year did the Bretton Woods system end and why?

3. Question #1 The Bretton Woods agreement was signed in Bretton Woods, New Hampshire The Bretton Woods agreement was signed in Bretton Woods, New Hampshire The Bretton Woods system ended in August, 1971 when Nixon closed the gold window – ending the ties between the dollar and gold. The Bretton Woods system ended in August, 1971 when Nixon closed the gold window – ending the ties between the dollar and gold.

4. Question #2 Suppose the current we have the following exchange rates: Suppose the current we have the following exchange rates: EUR/USD = 1.35 CHF/USD =.85 What is the CHF/EUR exchange rate? CHF/EUR =.63 (EUR/CHF = 1.59)

5. Question #3 Suppose that the current AUD/USD exchange rate is.77, the CPI in the US is 112 and the CPI in Australia is 102. Suppose that the current AUD/USD exchange rate is.77, the CPI in the US is 112 and the CPI in Australia is 102. What is the real exchange rate between Australia and the US? RER = eP* P =.70 US Goods per Australian Good 1.43 Australian Goods per US Good

6. Question #4 Suppose that Warren Buffet purchases a 10 year, E100,000 bond with a 5% annual coupon payment from the ECB. He pays E105,000 for it. The exchange rate is $1.30 per Euro and is not expected to change. Suppose that Warren Buffet purchases a 10 year, E100,000 bond with a 5% annual coupon payment from the ECB. He pays E105,000 for it. The exchange rate is $1.30 per Euro and is not expected to change. How would this be recorded in the balance of payments this year? (Remember, the US BOP are recorded in $s) How would this be recorded next year?

7. BOP (This Year) Current Account ExportsGoods:Services:ImportsGoods:Services: Net Factor Income: Net Unilateral Transfers: CA Balance: $0 Capital & Financial Account Foreign acquisition of US assets: US Treasuries: Private Securities: FDI: Currency: $136,500 US acquisition of foreign assets: FDI: Portfolio Investment: -$136,500 Official Reserve Assets Foreign acquisition of US ORA: US acquisition of foreign ORA: KFA Balance: $0

8. BOP (This Year) Current Account ExportsGoods:Services:ImportsGoods:Services: Net Factor Income: $6,500 Net Unilateral Transfers: CA Balance: $6,500 Capital & Financial Account Foreign acquisition of US assets: US Treasuries: Private Securities: FDI: Currency: US acquisition of foreign assets: FDI: Portfolio Investment: -$6,500 Official Reserve Assets Foreign acquisition of US ORA: US acquisition of foreign ORA: KFA Balance: -$6,500

9. Question #5 Suppose that the Oil counts for 30% of the US CPI and 60% of the Saudi Price index. Suppose that the Oil counts for 30% of the US CPI and 60% of the Saudi Price index. If OPEC decides to raise the price of oil worldwide by 25%, what will happen to the nominal and real exchange rate between the US and Saudi Arabia?

10. Question #5 For Simplicity, assume that all prices are initially 1. The following year we have the following.

11. Question #5 The nominal exchange rate adjusts according to the law of one price. The real exchange rate adjusts according to the following. No Change in the Nominal Exchange Rate A 7% Real Depreciation

12. Question #6 Suppose we have the following trade data: Suppose we have the following trade data: US Exports (to the rest of the World): $100M US Imports (from Europe): $150M Assume that we have no exports to Europe. The current exchange rate is $1.50 per Euro and the elasticity of import demand in the US is 2. What would the exchange rate need to be to eliminate the trade deficit?

13. Question #6 We need to lower our expenditures by 33% (from $150M to $100M). Each 1% depreciation of the dollar increases import prices by 1% Percentage Change in Expenditures = Percentage Change in Price (1 – Elasticity)* (-33%) 2 We need the dollar to depreciate by 33% to $2.00/Euro!

14. Question #7 Suppose that you were interested in taking a long position in 3 month Futures for GBP. Currently, the GBP is selling for $1.80, the 1 year TBill rate in the US is 3% while the British interest rate is 4%. What price would you pay for the future? Suppose that you were interested in taking a long position in 3 month Futures for GBP. Currently, the GBP is selling for $1.80, the 1 year TBill rate in the US is 3% while the British interest rate is 4%. What price would you pay for the future? i – i* = Forward Premium/Discount = Forward Premium/Discount = -.25% (The interest rates are on an annual basis) i – i* 4 F = (1.80)(1 -.0025) = 1.7955 I would accept F = (1.80)(1 -.01) = 1.782

15. Question #8 Suppose you purchase a call option on C$100,000 Canadian dollars with a strike price of $.75. On settlement day, the spot price of Canadian dollars is $.80. What is your payout from the option? Suppose you purchase a call option on C$100,000 Canadian dollars with a strike price of $.75. On settlement day, the spot price of Canadian dollars is $.80. What is your payout from the option? Payout = (.05)(100,000) = $5,000

16. Question #9 Suppose that inflation over the past year was 5% in Europe and 3% in the US. Further, due to relative price changes, the US has experienced a 6% real depreciation relative to Europe. What is the percentage change in the EUR/USD exchange rate? Suppose that inflation over the past year was 5% in Europe and 3% in the US. Further, due to relative price changes, the US has experienced a 6% real depreciation relative to Europe. What is the percentage change in the EUR/USD exchange rate? % Change in RER = % Change in eInflation* - Inflation+ 6%5%3%4% A 4% Nominal Depreciation

17. Question #10 Suppose that a 1 year call option on Euros with a strike price of $1.35 is selling for $.08 per Euro. If the interest rate is 4%, and the current spot rate is $1.35, what is the fair price for a 1 year Euro put with a strike price of $1.35? Suppose that a 1 year call option on Euros with a strike price of $1.35 is selling for $.08 per Euro. If the interest rate is 4%, and the current spot rate is $1.35, what is the fair price for a 1 year Euro put with a strike price of $1.35? Call Price + Strike Price (1+i) = Put Price + exchange rate $.08$1.35/1.04 $1.35 $.03

18. Lightning Round How many of the following sentences can you complete? (EX. 26 = L. in the A.: 26 Letters in the Alphabet) How many of the following sentences can you complete? (EX. 26 = L. in the A.: 26 Letters in the Alphabet) 8 = S. on a S.S 2 = N. it takes to T. 64 = S. on a C. 64 = S. on a C. 1,000 = W. that a P. is W. 3 = B. M. (S. H. T. R.) 3 = B. M. (S. H. T. R.) Signs on a Stop Sign Number it Takes to Tango Squares on a Checkerboard Words that a Picture is Worth Blind Mice (See How They Run)

19. Lightning Round How many of the following sentences can you complete? (EX. 26 = L. in the A.: 26 Letters in the Alphabet) How many of the following sentences can you complete? (EX. 26 = L. in the A.: 26 Letters in the Alphabet) 12 = S. of the Z. 4 = Q. in a G. 100 = B. of B. on the W. 100 = B. of B. on the W. 12 = D. of C. 12 = D. of C. 88 = P. K. 88 = P. K. Signs of the Zodiac Quarts in a Gallon Bottles of Beer on the Wall Days of Christmas Piano Keys