Hello, can you figure out questions 4-5 and provide detailed solutions as to how you got your answer. Thank you.

Fin 3551 - International Finance (Fall 2015) PROBLEM SET #3 (due Friday, Oct 23) 1. This question illustrates an example of trade induced by comparati ve advantage. Assume that China and France each have 1,000 production units. With one unit of production (a mix of land, labor, capital, and technology), China can produce either 9 containers of toys or 5 cases of wine. With one unit of production, France can produce either 3 containers of toys or 5 cases of wine. Thus, a production unit in China is three times as efficient compared to France when producing toys, but equally efficient when producing wine. Assume at first that no trade takes place. China allocates 800 production units to building toys and 200 production units to producing wine. France allocates 200 production units to building toys and 800 production units to producing wine. Assumptions Output per unit of production input - China Output per unit of production input - France T otal production inputs - China T otal production inputs - France T oys (containers/unit) 9 3 Wine (cases/unit) 5 5 1,000 1,000 (a) What is the production in China and France without trade? How many toys and how much wine will each country produce if not trading? (b) Assume complete specialization, where China produces only toys and France produces only wine. What would be the total production? (c) China's domestic price is 9 containers of toys for 5 cases of wine. Assume China produces 9,000 containers of toys and exports 1,800 containers to France. Assume France produces 5,000 cases of wine and exports 1,000 cases to China. What will be the production (toys and wine) in each country? What will be the consumption (toys and wine) in each country? (d) France's domestic price is 3 containers of toys for 5 cases of wine. Assume China produces 9,000 containers of toys and exports 600 containers to France. Assume France in turn produces 5,000 cases of wine and exports 1,000 cases to China. What will be the production in each country? What will be the consumption in each country? (e) Assume France and China negotiate a price for trading toys in exchange for wine. They settle that France will export 1,000 cases of wine for the mid-point price (in this case, 6 toys per 5 wines). What will be the production in each country? What will be the consumption in each country? 2. Theresa Nunn is planning a 30-day luxury vacation on Pulau Penang, Malaysia, one year from now. The present charge for a presidential suite plus meals in Malaysian ringgit (RM) is RM 1,120/day. The Malaysian ringgit presently trades at RM4.200/$. She figures out the dollar cost today for a 30-day stay would be $8,000. The hotel informed her that any increase in its room charges will be limited to any increase in the Malaysian cost of living. Malaysian inflation is expected to be 3.75% per annum, while U.S. inflation is expected to be only 1.50%. (a) How many dollars might Theresa expect to need one year hence to pay for her entire 30-day vacation? (b) By what percent will the dollar cost have gone up? Why? 3. Assume that the export price of a Toyota Corolla from Osaka, Japan is 2,500,000. The spot exchange rate is 119.50/$. The forecast rate of inflation in the United States is 1.25% per year and is 0.0% per year in Japan. Use this data to answer the following questions on exchange rate pass-through. (a) What was the export price for the Corolla at the beginning of the year expressed in U.S. dollars? (b) Assuming purchasing power parity holds, what should be the exchange rate at the end of the year? (c) Assuming 100% pass-through of exchange rate, what will be the dollar price of a Corolla at the end of the year? (d) Assuming 65% pass-through, what will be the dollar price of a Corolla at the end of the year? 4. A foreign exchange trader at J.P. Morgan Chase can borrow up to $4 million, or the foreign currency equivalent of the bank's short term funds, for the purpose of a covered interest arbitrage with the Danish Krone. (a) Using the following quotes (interests are per year), can the trader make covered interest arbitrage (CIA) profit? (b) What actions and steps should he or she take in order to achieve an arbitrage profit? (c) What will be the expected profit from these steps? Arbitrage funds available $4,000,000 Spot exchange rate (kr/$) 3-month forward rate (kr/$) U.S. dollar 3-month interest rate Danish kroner 3-month interest rate 6.570 6.600 1.60% 4.40% 5. A foreign exchange trader at Goldman Sachs can invest $1.2 million, or the foreign currency equivalent of the bank's short term funds, in a covered interest arbitrage with British pound. Using the following quotes (interests are per year), can the trader make covered interest arbitrage (CIA) profit? What actions would he or she take to make the profit? Calculate the expected profit. Arbitrage funds available Spot exchange rate ($/) 6-month forward rate ($/) U.S. dollar 6-month interest rate British pound 6-month interest rate $1,200,000 1.5400 1.5150 2.600% 4.600% 6. Use the table below containing economic, financial, and business indicators from October 20, 2007, issue of the Economist (print edition) to answer the following problems. (a) What are the current spot exchange rates (on Oct17, 2007) for the following cross rates? (i) Japanese yen/U.S. dollar exchange rate (ii) Japanese yen/Australian dollar exchange rate (iii) Australian dollar/U.S. dollar exchange rate (b) Assuming purchasing power parity, and assuming that the forecasted change in consumer prices is a good proxy of predicted inflation, forecast the following cross rates: (i) Japanese yen/U.S. dollar in one year (ii) Japanese yen/Australian dollar in one year (iii) Australian dollar/U.S. dollar in one year (c) Assuming International Fisher applies to the coming year, forecast the following future spot exchange rates using the government bond rates for the respective country currencies: (i) Japanese yen/U.S. dollar in one year (ii) Japanese yen/Australian dollar in one year (iii) Australian dollar/U.S. dollar in one year (d) If the nominal interest rate is the government bond rate, and the current change in consumer prices is used as expected inflation, calculate the implied \"real\" rates of interest by currency. (i) Australian dollar \"real\" rate (ii) Japanese yen \"real\" rate (iii) U.S. dollar \"real\" rate (e) Using the spot rates and three-month interest rates above, calculate the 90-day forward rates for the following: (i) Japanese yen/U.S. dollar exchange rate (ii) Japanese yen/Australian dollar exchange rate (iii) Australian dollar/U.S. dollar exchange rate Country Australia Japan United States Late st Q tr 4.3% 1.6% 1.9% Country Australia Japan United States Ye ar Ago 4.0% 0.9% 2.1% Gross Dome stic Product Fore cast Q tr 2007e 3.8% 4.1% -1.2% 2.0% 3.8% 2.0% Country Australia Japan United States Consume r Price s Late st 2.1% -0.2% 2.8% Trade Balance Last 12 Months (billion $) -13.0 98.1 -810.7 Industrial Production Fore cast 2008e 3.5% 1.9% 2.2% Fore cast 2007e 2.1% 0.0% 3.0% Une mployme nt Rate Re ce nt Q tr 4.6% 4.3% 1.9% Late st 4.2% 3.8% 4.7% Inte re st Rate s 3-Month Late st 1-Yr Govt Latest 6.90% 6.23% 0.73% 1.65% 4.72% 4.54% Curre nt Account Last 12 Months Fore cast 07 (billion $) (% of GDP) -$47.0 -5.7% $197.5 4.6% -$793.2 -5.6% Curre nt Units (pe r US$) O ct 17 th 1.12 117 1.00 Ye ar Ago 1.33 119 1.00