Answer all./

As Malaysia grows and the productivity gap with the advanced economies is closing, wages in Malaysia will increase. With higher wages, prices will have to increase also and the overall price level will rise. If non-tradables have the same prices in the US and Malaysia, then the actual exchange rate will move closer towards the equilibrium rate and eventually the two rates will converge. b. During the Asian crisis in 1997-98 Mahathir Mohamad, Malaysia's former prime minister, imposed capital controls in order to stop any further depreciation of the ringgit. As the pressure on the Asian currencies subsided in the subsequent few years, the government started to remove regulations associated with capital controls and the regime for withdrawing investments from Malaysia became much more liberal. What do you think will be the immediate effect of complete removal of all capital controls on the ringgit? What will determine the direction in which the ringgit moves in the long run if there are no capital controls? (5 points).

3. Growth and Natural Resources (10 points). In November 2007, Brazil's state-controlled oil company Petrobras announced that they have discovered new and significant oil reserves in the Tupi oilfield off the coast of Brazil. Given current estimates, Brazil could join the world's "top 10" oil producers. At the time of the discovery, Petrobras President Sergio Gabrielli said that these discoveries would give Brazil the world's eighth-largest oil and gas reserves. "Brazil's reserves will lie somewhere between those of Nigeria and those of Venezuela," Gabrielli said at a news conference. Assume that the reserves are indeed "extractable" and the estimates are right. This sudden increase in nation's wealth will now allow Brazil to grow fast and become a rich country. Evaluate this statement and provide evidence to support your argument. Are there arguments in the opposite direction?

4. Capital Inflows, Monetary Policy and the Yield Curve (Total: 14 Points). In recent months, capital inflows to Brazil have appreciated its currency. Capital is attracted by high interest rates (the Central Bank interest rate is 12.25%). These capital inflows increase the foreign reserves of the central bank as the foreign currency is exchanged by the local currency (Real). So far inflation has been contained but there is a risk that it will go up, even more because of what they see in other countries. Therefore, the central bank of Brazil is worried about increases in inflation. The president of the central bank of Brazil Henrique Meirelles said in a recent interview in Sao Paolo: "The biggest concern over the next 12 months for Brazil and the rest of the world is inflation. The risk is that prices for food and raw materials will continue to rise. If every central banker decides that this is a problem for other countries, nobody will do anything and there will be [faster] worldwide inflation." a. How do these capital flows that Brazil is experiencing influence the ability of the central bank to run monetary policy? Is the appreciation of the currency consistent with their interest rates? (7 points)

55. Box spreads are used to guarantee a fixed cash flow in the future. Thus, they are purely a means of borrowing or lending money, and have no stock price risk. Consider a box spread based on two distinct strike prices (K, L) that is used to lend money, so that there is a positive cost to this transaction up front, but a guaranteed positive payoff at expiration. Determine which of the following sets of transactions is equivalent to this type of box spread. (A) A long position in a (K, L) bull spread using calls and a long position in a (K, L) bear spread using puts. (B) A long position in a (K, L) bull spread using calls and a short position in a (K, L) bear spread using puts. (C) A long position in a (K, L) bull spread using calls and a long position in a (K, L) bull spread using puts. (D) A short position in a (K, L) bull spread using calls and a short position in a (K, L) bear spread using puts. (E) A short position in a (K, L) bull spread using calls and a short position in a(K, L) bull spread using puts.

56. Determine which of the following positions has the same cash flows as a short stock position. (A) Long forward and long zero-coupon bond (B) Long forward and short forward (C) Long forward and short zero-coupon bond (D) Long zero-coupon bond and short forward (E) Short forward and short zero-coupon bond

60. Farmer Brown grows wheat, and will be selling his crop in 6 months. The current price of wheat is 8.50 per bushel. To reduce the risk of fluctuation in price, Brown wants to use derivatives with a 6-month expiration date to sell wheat between 8.60 and 8.80 per bushel. Brown also wants to minimize the cost of using derivatives. The continuously compounded risk-free interest rate is 2%. Which of the following strategies fulfills Farmer Brown's objectives? (A) Short a forward contract (B) Long a call with strike 8.70 and short a put with strike 8.70 (C) Long a call with strike 8.80 and short a put with strike 8.60 (D) Long a put with strike 8.60 (E) Long a put with strike 8.60 and short a call with strike 8.80