6. Groucho Marx, as Governor of Freedonia's central bank, has problems. He sees the value of his currency, the FDK, under constant attack from Rosor, a wealthy mutual-fund manager. Apparently, Rosor believes that the FDK will soon devalue from GBP 1.000 to 0.950. (a) Currently, both GBP and IDK interest rates are 6% pa. By how much should Groucho change the one-year interest rate so as to stabilize the spot rate even if Rosor expects a spot rate of 0.950 in one year? Ignore the risk premium-that is, take 0.950 to be the certainty equivalent. (b) If the interest-rate hike also affects Rosor's expectations about the future spot rate, in which direction would this be? Taking into account also this second-round effect, would Groucho have to increase the rate by more than your first calculation, or by less?2. You hold a set of forward contracts on 1111:, against usu {=Hc]. Below I shmnr you the forward prices in the contract; the current forward prices {if available} or at least the current spot rate and interest rates {if no forward is available for this time to maturity}. Compute the fair value of the contracts. {a} Purchased: sun 1m 6|] days {remaking}. I-storic rate: 135D; current rate for same date: 1.5111]; riskfree rates {simple per annum}: 3% in van, 4% in sun. {b} Purdiasazl: Elm 2.5m '75 days {remaining}. Historic rate: 1313!]; current spot rate: 1.513325; riskflee rates {simple per annum}: 3% in mm, 4% in sun. [c]: Sold: 11m 035m 13] days {remaining}. Historic rater 1.4m; current rate for same date: 1.495; riskfree rates [simple per annum}: 3% in van, 41% in sun. 4. 60-day interest rate (simple, p.a.) are 3% at home (UsD) and 4% abroad (EUR). The spot rate is 1.250. There are no spreads, as you probably noticed. (a) Check that investing EUR Im, hedged, returns as much as uso 1.25m (b) Check that if taxes are neutral, and the tax rate is 30%, also the after-tax returns are equal. (Yes, this is trivial.) (c) How much of the income from swapped EUR is legally interest income and how much is capital gain or loss? (d) If you do not have to pay taxes on capital gains and cannot deduct capital losses, would you still be indifferent between uso deposits and swapped EUR?1. Check analytically the equivalence of the two alternative ways to do the following trips: (a) Financing of international trade: you currently hold a rc claim on a customer payable at T, but you want cash nc instead. 15:01 on 8 March 2009 P. Sercu, K.U.Leuven SB&E 21 (b) Domestic deposits: you currently hold spot nc and you want to park that money in nc, risk-free. (c) You want to borrow nic for 3 months. (d) Immunizing a nc dent: you want to set aside some of your cash nc so as to take care of a future Fc debt. (e) Borrowing rc. You want to borrow rc but a friend tells you that swapping a HC loan is much cheaper6. In a figure discussed in the text, and reproduced below, I showed plots of the gold price and mentioned that, if we had corrected for inflation, then the 1980 price would be seen to be much above the current peak: obviously, the small percentage price rise of gold, between 1980 and 201017, must have been way below the percentage rise of the us CFL 1501 on 8 March 109 . Samca, KU.Lewon SALE 18 CHAPTER 3. SPOT MARKETS FOR FOREIGN CURRENCY (a) In the above we presumably use us CPI rate to deflate the uso prices. But is this result generalizable to all countries-is this conclusion necessarily also valid for Japanese or German investors? Why (not)? (b) If you think the result does not necessarily hold true elsewhere, what would you bet wn.t. a hyper-inflator like Zimbabwe?: if inflation is much higher, then the real price of gold must have fallen even more- no? (c) What would guarantee identical real price paths in all countries: APPP, RPPP, or what?1. You have just graduated from the University of Florida and are leaving on a whirlwind tour to see some friends. You wish to spend uso 1,000 each in Germany, New Zealand, and Great Britain (USD 3,000 in total). Your bank offers you the following bid-ask quotes: USD/EUR 1.304-1.305, UsD/NZD 0.67- 0.69, and UsD/GBP 1.90-1.95. (a) If you accept these quotes, how many EUR, NZD, and GBP do you have at departure? (b) If you return with EUR 300, NZD 1,000, and GBP 75, and the exchange rates are unchanged, how many uso do you have? (c) Suppose that instead of selling your remaining EUR 300 once you return home, you want to sell them in Great Britain. At the train station, you are offered GBP/EUR 0.66-0.68, while a bank three blocks from the station offers GBP/EUR 0.665-0.675. At what rate are you willing to sell your EUR 300? How many Ger will you receive