1. Mid-Test Answer Yohanes Jimmy

2. 1a. CA Deficit and Currency  CA Deficit  Import > Export  Import  need more foreign currency  Value of foreign currency increases  Now: foreign currency is under-valued, or domestic currency is over-valued.  Thus, foreign currency is predicted to be appreciated with respect to domestic currency in the future.

3. 1b. CA Deficit and Crisis  Currency crisis is depreciation of domestic currency in significant amount within relatively short period.  That is caused by market participants short (sell) domestic currency in large amount, almost simultaneously. Why?  Increasing CA deficit  reduce foreign reserve  If foreign reserve depletes  domestic currency is depreciated more deeply.  Government will release fixed exchange rate policy, and concentrate to handle its increasing foreign debt.  Thus, domestic currency is devaluated in significant amount  market participants anticipate it by taking short position on domestic currency.

4. 2. Balance of Payment  Current account (A)  Cap. and Fin. account(B) BOP (A+B) - 400 + 360 - 40 Indonesia’s BOP 2011

5. 3. Forward Quotation a.USD/CHF Prev. day: 0.9272 USD/CHF Today: 0.9037 b.USD/CHF: forward rate < spot rate  USD is traded at DISCOUNT with respect to CHF in fwd market. c.Forward point quotation USD is depreciated with respect to CHF in spot market CHF/USDTodayPrev. Day Spot rate1.10661.0785 1-month forward76 3-months forward2221 6-months forward4048

6. 4. Hedging Receive USD 1,000,000 in the next 6 months t=0t=6 th month BidAsk Spot USD/IDR8,3008,900 180-day forward3.0%6.0% BidAsk Spot USD/IDR8,3008,900 180-day forward8,4259,167 In the 6 th month, we have to sell USD 1 million at agreed forward rate. IDR received: = 1,000,000 x 8,425 = 8,425,000,000 FORWARD MARKET

7. 4. Hedging Receive USD 1,000,000 in the next 6 months t=0t=3 rd month IDR 8,381,378,549 Borrow USD now Sell USD to get IDR now Time deposit in IDR for 6 months MONEY MARKET Borrow USD Invest IDR in time deposit for 6 months (interest = 6% p.a.) Sell USD to get IDR IDR 8,137,254,902 BidAsk Spot USD/IDR8,3008,900 180-day forward8,4259,167 USD 980,392 Pay loan in USD+ interest for 6 months (interest = 4% p.a.) USD 1,000,000 at 8,300 Receive IDR

8. 4. Hedging  Receive from money market = IDR 8,425,000,000  IDR before time deposit:  Convert to USD  USD Interest rate

9. 5. Triangular Arbitrage Tokyo: EUR/JPY: 106.10 – 106.90 USD/JPY: 76.60 – 76.90 Paris: USD/EUR: 0.7120 – 0.7170 CHF/EUR: 0.6870 – 0.6890 100 JPY/EUR: 0.9410 – 0.9450 Cross rate in Paris: USD/JPY: 75.34 – 76.20 Paris EUR Paris Tokyo USD JPY CHF Profit Start

10. 5. Triangular Arbitrage Pa: Sell CHF to get EUR  EUR 3,435,000,000 Pa: Buy USD with EUR  USD 4,790,794,979 To: Sell USD to get JPY  JPY 366,974,895,397 Pa: Sell JPY to get EUR  EUR 3,453,233,766 Pa: Buy CHF with EUR  CHF 5,011,950,313 Initial Capital  CHF 5,000,000,000 Profit  CHF 11,950,313 %Profit  0.239%

11. 5. Triangular Arbitrage (another approach) Tokyo: USD/JPY76.60 - 76.90 Paris: USD/JPY75.34 - 76.20  quotation  cross rate Profit=  In EUR Initial capital  CHF 5,000,000,000 Convert CHF to EUR  EUR 3,435,000,000 Profit from arbitrage  EUR 18,233,766  0.5308% Capital + profit  EUR 3,453,233,766 Convert EUR to CHF  CHF 5,011,950,313 Profit in CHF  CHF 11,950,313