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principles of finance

Questions and Answers of Principles Of Finance

Exercise 5 In this exercise, we will develop a model that analyzes the choice of exchange regime based in a political environment where there are two parties, the right and the left, each with
Exercise 4 Exchange rate policy, in general, has an impact on inflation. Consider the economic model developed in Section 11.1, particularly the case that incorporates the distributive effects of
Exercise 3 We have seen over the course of the text that the real exchange rate has important distributive effects, which, in turn, make this variable an element of fundamental importance as a
Exercise 2 Just as what happens with the choice of exchange rate regime, the choice of the exchange rate level also has highly important electoral implications. Governments cannot directly choose the
Exercise 1 As has been seen throughout this chapter, political factors, such as government objectives and the weight of sectors affected by exchange rate policy, are important elements that affect
Exercise 7 The incentives for a country to join a monetary union depend on the possible sources of economic shocks and the mechanisms by which such shocks will be absorbed when the country
Exercise 6 Answer what the following items request:a. Explain what the Bretton Woods system was and the reasons for its collapse.b. Even after the end of the Bretton Woods system at the beginning of
Exercise 5 In 2002, the economic news reported that a group of six countries, formed by Saudi Arabia, Bahrain, the United Arab Emirates, Kuwait, Oman, and Qatar, were considering the creation of a
Exercise 4 This exercise deals with the choice between a fixed exchange rate regime and a floating exchange rate based on a variation of the Dornbusch model seen in Section 7.2. The equilibrium
Exercise 3 In relation to the exchange rate regimes presented throughout this chapter, answer what the following items demand:a. What factors should be considered by policymakers in the choice
Exercise 2 Consider the elements of the impossible trinity: (i) independent monetary policy, (ii) free capital mobility, and (iii) fixed exchange rate.a. Using the concepts seen throughout this
Exercise 1 In relation to exchange rate regimes, answer what the following items request:a. List at least five distinct exchange rate regimes, in progressive order, beginning with a totally flexible
Exercise 10 Consider a small, open economy that satisfies absolute purchase power parity, assuming, for simplification, that lnðPt Þ 5 0; where Pt is the international price index. The loss
Exercise 9 Consider a small, open economy that has a nominal exchange rate fixed at S 5 5 pesos/dollar. In this economy, the La Union Bank possesses $200 million pesos in its own capital, receives
Exercise 8 In general, currency crises are associated with severe falls in economic activity. However, a good part of the first- and second-generation currency crisis models does not explicitly model
Exercise 7 Consider a situation where the defense of a fixed exchange rate regime can, at the limit, result in default of the foreign debt for a given country. In this case, international investors
Exercise 6 Regarding currency crisis models, answer what the following items request.a. Explain what consists in third-generation currency crisis models, highlighting the main characteristics as well
Exercise 5 Consider an economy that adopts a fixed exchange rate regime and that possesses the volume of reserves R . 0, administered by the central bank with the objective of defending exchange
Exercise 4 Answer what the following items request.a. Explain the break of the Bretton Woods regime under the perspective of the firstgeneration currency crisis model seen throughout this chapter.
Exercise 3 Consider a second-generation currency crisis model. Assume the gain of maintaining a fixed interest rate is equivalent to 3% of GDP.a. Consider the following situation: If the central bank
Exercise 2 Answer what the following items request.a. Currency crises are normally followed by a sharp fall in economic activity, which results in recession. Based on the first-generation currency
Exercise 1 Consider a small, open economy inhabited by a large number of individuals who live for an infinite number of periods and who can perfectly forecast the future. In this economy there is
Exercise 7 Based on the economic model developed in Section 8.4:a. Compare the behavior of the exchange rate when facing shocks on the current account when assets are perfect substitutes and when
Exercise 6 In the previous chapters, where we considered domestic and foreign assets as perfect substitutes, the uncovered interest rate parity captured this hypothesis in the models
Exercise 5 Consider an economic environment identical to that developed in Section 8.4. What conditions must be met for the system formed by the portfolio balance relation and the external balance
Exercise 4 Consider an economic environment where there are only two economies, a domestic and a foreign, and where assets are perfect substitutes. Assume that the accumulation of net foreign assets
Exercise 3 Consider an economy with external credit in a foreign currency and external debt in local currency.a. Obtain a mathematical expression to measure the NIIP variation of this economy as a
Exercise 2 After the 2007/2008 economic crisis, an important debate was revived that questioned the role of the dollar as the world reserve currency, the so-called exorbitant privilege. Respected
Exercise 1 If a country has problems borrowing resources in its own currency, economists say that this country suffers from original sin.a. Why do emerging economies, in general, suffer from original
Exercise 6 Consider a simplified version of the Dornbusch model seen in this chapter, described by the following equations:IS: yt 5 y 1 ηðst 1 pt 2 ptÞLM: mt 2 pt 5 yt 2 it UIP: it 5 it 1 Efst11
Exercise 5 Assume an integration mechanism similar to the European Monetary System (EMS),11 however, with only two countries: Germany and France. Assume that Germany has an independent monetary
Exercise 4 Based on the MundellFleming model, answer the following items:a. How does a fall in international interest rates affect the real output in a small, open economy under a flexible exchange
Exercise 3 Consider the MundellFleming model to determine the nominal exchange rate. Imagine now that the aggregate demand of the domestic and foreign economies obeys the following quantitative
Exercise 2 Decide if the following statements are true, false or if the veracity is uncertain. Explain your answers.a. An economy subject to shocks should adopt a floating exchange rate regime to
Exercise 1 At the beginning of the 1980s, the president of the United States Federal Reserve decided to adopt a strong contractionist monetary policy, seeking to contain the advance of domestic
Exercise 7 Consider the monetary model seen throughout this chapter, where the behavior of the nominal exchange rate is reproduced by the following equation:st 5 ðmt 2 mt Þ 2 ðyt 2 yt Þ 1
Exercise 6 Consider a version of the monetary model seen throughout this chapter, composed by the following equations:LM: mt 2 pt 5 y 2 αit UIP: it 5 it 1 Efst11 2 stg PPP: st 5 pt 2 pt MG: mt11 2
Exercise 5 Throughout 2012, the euro suffered significant depreciation in relation to the American dollar. Consider a monetary model to determine the nominal exchange rate as described in this
Exercise 4 In the monetary model to determine the exchange rate studied throughout this chapter, the nominal exchange rate trajectory is given by the equation:sðtÞ 5 f ðtÞ 1 ηEt dsðtÞdt;where
Exercise 3 Consider an economy with flexible prices as presented in this chapter. By hypothesis, assume that there is free mobility of goods with no transaction costs, so that purchasing power parity
Exercise 2 At t 5 0, a foreign exporter sells you their merchandise. However, you will make the payment(in foreign currency) for this product in time t 5 f =θ2 . To guarantee the rate, the exporter
Exercise 1 Let there be two economies: domestic and foreign. The money market equilibrium is given by the two following equations:mt 2 pt 5 φyt 2 λit mt 2 pt 5 φyt 2 λit where yt, pt, mt, and
Exercise 8 Based on the content presented in this chapter, answer what the following items request:a. Comment on the statement: “an increase in productivity causes the real exchange rate to
Exercise 7 Consider a world where there are two countries, denominated A and B, which have trade relations, in an economic environment identical to that presented in Section 5.3. In each country,
Exercise 6 The real exchange rate of the economy is defined as RERt StPt Pt , where St represents the nominal exchange rate, Pt the international price index, and Pt the domestic price
Exercise 5 Consider a small, open economy where there are two types of goods: tradables, represented by T, and nontradables, represented by N. The representative consumer preferences in this economy
Exercise 4 There are two economies, one domestic and the other foreign. There are two types of goods:tradable and nontradable. Assume that the foreign economy consumes only tradable goods.The
Exercise 3 Consider the same model as in the previous exercise, with domestic and foreign price indexes given by P 5 PαNP12α T and P 5 PβN P12βT , respectively, and with α; βAð0; 1Þ. Now
Exercise 2 Consider an economic environment where there are two economies, a domestic and a foreign. Assume that the price levels in the domestic economy are given by P 5 PαNP12α T , where PT
Exercise 1 Consider a small, open economy that exists for two periods. This economy has a representative agent who, in the first period, receives an endowment of 6 units of a tradable good ðYT 1
Exercise 14 Determine if the following statements are correct, incorrect, or uncertain. Justify your answer.a. In a situation where a country chooses to go into debt, such deterioration in its
Exercise 13 Consider a small open economy that exists for two periods and that possesses an initial stock of assets B1 , 0, i.e., that there is indebtedness inherited from a period before the
Exercise 12 Consider a small, open economy that exits for two periods and that has an endowment Yt for each period of the only existing good. Furthermore, assume that such endowments are compatible
Exercise 11 Consider a small, open economy where there is the accumulation of capital and production.Production in the domestic economy is given by means of function:Yt 5 AtKαt :There is total
Exercise 10 Consider a closed economy that exists for two periods with a production function given by Yt 5 Kαt L12α t ;where αAð0; 1Þ, Kt is the capital endowment and Lt is the labor endowment
Exercise 9 The world economy is formed by two countries, foreign and home, which exist for two periods. Each individual in each country receives an exogenous, perishable endowment of goods for each
Exercise 8 Consider a small economy where the individuals live for two periods and receive an exogenous endowment for each period, Yt. Under autarky, the aggregate offer is equal to the aggregate
Exercise 7 Consider a small, open economy, with a single good and a representative individual who lives for two periods. In this economy, there is a government that has a balanced budget.There is no
Exercise 6 Consider a two-period intertemporal model, where the representative agent has a utility function given by U1 5 C12σ 1 1 2 σ 1 β C12σ 2 1 2 σ ;where Ct in consumption for the period t;
Exercise 5 Consider an endowment economy that exists for two periods. Assume that the representative individual preferences are represented by the following utility function:U1 5 ffiffiffiffiffi C1 p
Exercise 4 Consider a small, open economy with two periods where there is only one consumer good for each period. The representative agent preferences are represented by U1 5 lnðC1Þ 1 β
Exercise 3 Consider the model of an open economy with two periods, with only one good and with no investment. The representative consumer preferences for this economy are represented by the utility
Exercise 2 With respect to the sustainability of deficits in current account, answer the following:a. Intertemporal models for determining current account say that it may be desirable for a
Exercise 1 Consider a small, open economy where there is one good and one representative individual who lives for two periods. In this simplified economy, there is neither government nor 22 More
Exercise 11 Suppose that you are an operator who works in an investment bank and you need to close on a strategy based on the future market of the yen for the next 3 months. You know that a Japanese
Exercise 10 In the 1970s, the Mexican government tied the exchange rate of the peso to the North American dollar. During the same period, short-term Mexican interest rates, those defined by their
Exercise 9 Suppose that the Russian economy maintains trade relations only with countries in the Eurozone and China, and that 80% of Russian trade is with the Eurozone and the remaining 20% with
Exercise 8 Consider a small, open economy that decides to establish parity between their currency and the dollar, but where the greater part their international trade is done with Europe.a. Consider
Exercise 7 Russia and China both produce two goods: cellular telephones, a tradable good designated as T, and haircuts, a nontradable good designated as N. Each good is produced in competitive
Exercise 6πe EUR is the inflation expected in the Eurozone between period t and period t 1 1, and πe UK the inflation expected in the United Kingdom during the same period. St is the nominal
Exercise 5 Consider two bonds, one of them Spanish, denominated in euros (h), and the other denominated in Chilean pesos ($), a Chilean bond. Assume both bonds have a 1-year maturity and that they
Exercise 4 A country imposes an import tariff, represented by τ, with τA(0.1). Suppose that the currency in this country is the peso and that the international currency accepted for transactions
Exercise 3 Suppose the Mexican government imposes a tax rate of t% on the profitability of Mexican bonds as well as on gains received from exchange rate operations. How will this situation affect the
Exercise 2 Suppose that the 3-month interest rate on English bonds is 10%. The rate of return for the US bonds of the same maturity is 6%. The spot exchange rate between the dollar and pound is 2
Exercise 1 Suppose the nominal interest rate on a 1-year US bond is 5% and the nominal interest rate in Mexico for a bond of the same maturity is 10%. The current exchange rate in the spot exchange
Exercise 8 The relation of foreign debt/GDP of country Indebted is 60%, given that the greatest part is sovereign debt (i.e., it represents government obligations with foreign investors). Given that
Exercise 7 Derive the mathematical condition that represents a necessary condition for the debt/GDP relationship for a determined economy to remain constant.
Exercise 6 Consider a country, that we will call Debtor, has a negative NIIP and adopts a policy to achieve surplus in the trade balance sufficient to pay only a small but constant portion of the
Exercise 5 Consider an economy, that we will call Balanced, which always maintains a current-account balance equal to zero. Between years 1 and 2, government expenditures in consumption and
Exercise 4 Suppose that countries A and B are economically similar, being different only by the fact that country A has a high level of foreign debt, while country B is a net foreign creditor. In
Exercise 3 Before the 2008 global economic crisis, one of the most serious economic problems in the American economy was that of the twin deficits, an expression used to represent a situation in
Suppose that, in a given year, Brazil performed the following foreign transactions:1. A consortium of American banks lends Petrobrás US$50 million.2. Brazil sends US$20 million in humanitarian aid
Exercise 1 A country performed, in a given year, the following transactions abroad. All payments were made in dollars.1. Exports paid in cash: US$500 million 2. Imports paid in cash: US$400 million
4. On 15 February 2017 a bond of XYZ Corporation is selling for $923. The bond has a $30 semi-annual coupon payment on 15 May 2017 and each 6 months afterward until 15 November 2025, when it pays
d. Use Datedif to determine Professor Smith’s age in months.
c. Use Weekday to determine the day of the week when Professor Smith was born.
b. Divide by 365 to compute Professor Smith’s age in years.
a. Subtract the two dates to compute Professor Smith’s age in days.
3. Prof. Smith was born on 15 February 1964. Today is 15 October 2016.
c. Use Solver with an appropriate constraint to find the second value of x for which the function y = −2x2 − 2x +14 has a value of 0.
b. Using Goal Seek on the function, find x such that y = 0. Which of the two values of x does Goal Seek find?
a. Graph the function y = −2x2 − 2x +14 for x = – 4.0, – 3.75, – 3.50, . . ., 3.0. What are the approximate values of x for which y = 0?
4. Graphing and Goal Seek:
b. Use Solver and a constraint to compute the proportions xA and xB for a portfolio which has the minimum standard deviation σP and which has a return of at least 18%.
a. Use Solver to compute the proportions xA and xB for a portfolio which has the minimum standard deviation σP.
σ (“Sigma”), the riskiness of the stock
r, the interest rate
X, the option’s exercise price (also called the option’s strike price)
S, the stock price today
5. (Do this example only if you’ve studied Chapter 17– 20 on option pricing.)The Black– Scholes option pricing model, defined in Chapter 19, prices call and put options based on five parameters:

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