I have been assigned Canda 1995-2000. The following pages contain annual data on interest rates, inflation rates, and percentage change in exchange rates (based on indirect quotes) for foreign countries, including the US, for the period 1995 - 2007. Each one of you is assigned to a foreign country and a six-year time period (1995-2000 or 2000-2006). Please consult the attached list to determine your assigned country and time period. Please use the attached sheets to answer the questions listed based on calculations using the data for the assigned country and the US during the assigned time period. Use geometric instead of arithmetic averages. Use exact instead of the approximate method. There is only one correct answer to these questions. You will be graded

The following pages contain annual data on interest rates, inflation rates, and percentage change in exchange rates (based on indirect quotes) for forcign countrics, including the US, for the period 19952007 Each one of you is assigned to a foreign country and a six-year time period (1995-2000 or 2001-2006). Please consult the attached list to determine your assigned country and time period. Please use the attached sheets to answer the questions listed based on calculations using the data for the assigned country and the US during the assigned time period. Use geometric instead of arithmetic averages. Use exact instead of the approximate method. There is only one correct answer to these questions. You will be graded on whether or not your answers are correct. The necessary information and concepts are all from Chapter 4 . I will discuss the solution techniques to these problems only during class. I will not discuss them with anyone on an individual basis outside the class Please answer the following five questions: Q1. During the assigned time period: US dollar appreciated / depreciated (choose one) in real terms against the currency of foreign country. Q2. During the assigned period, what was the average ancovered rate of return from the US viewpoint for the foreign country? Q3. During the assigned period, what was the average uncovered rate of return from the foreign country's viewpoint? Q4. Based on your answers to questions 2 and 3. given perfect hindsight about interest rates and exchange rate changes during the assigned time period you should have: Invested/ borrowed (choose one) in the US and invested/ borrowed (choose one) in foreign country. Q5. Assume that you could both borrow and invest at the average interest rates prevailing in foreign country and in the US during the assigned time period. Also assume that you have a line of eredit for one million dollars in the US or an equivalent amount in foreign country. Given perfect hindsight about interest rates and exchange rate changes, please calculate your total profit in dollars using uncovered interest arbitrage during the assigned time period if you followed the strategy chosen in Q4. Work Sheet: Statistical Report Geometric and Arithmetic Means of Rates and Percentages If the rates for years 1,2,3,N are R1,R2,R3,.RN, then you can calculate the arithmetic and geometric mean or averages of these rates over the N years, as follows: Arithmetic Mean =(R1+R2+R3++RN)/N Geometric Mean =[(1+R1)(1+R2)(1+R3)(1+RN)]1/N1 Note, that in the geometric mean formula, the percentages are written in decimals. For example, we use 0.10 instead of 10% and -0.02 instead of 2%. Also in the end we take the Nth root of the product, where N is the number of years in the averaging period. It is important to know that the geometric mean is a more accurate measure than the arithmetic mean. Always try to use the geometric mean method when calculating averages of rate of returns or percentages. Let us assume the following rates of return for the five year period (2000-2004) : Our estimate of the average rate of retum over the 200004 period based on: ArithmeticMeanGeometricMean=(0.04750.08+0.005+0.23+0.07)/5=0.0545=5.45%=[(1+0.0475)(10.08)(1+0.005)(1+0.23)(1+0.07)]1/31=(1.02746672)1/31=0.04973=4.973% Reference Tables International Economic Trends Exchange Rates International Economic Irends Reference Tables Short-Term Interest Rates