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Country Switzerland Four-year time period Inflation Rate: US Inflation Rate: Foreign Country Interest Rate: US Interest Rate: Foreign Country % Change in(Indirect quote) % Change in (Direct quote) PPP Implications: Annual Uncovered Rate (for US) 1998 1999 2000 2001 1.50% 2.20% 3.40% 2.80% - 0.80% 1.60% 1% 5.50% 5.30% 6.50% 3.70% 1.50% 1.40% 3.20% 2.90% 0.10% -0.10% -3.70% -12.50% ### 12.50% (1 + % change in DQ ) 1999 ### 103.70% -3.70% 96.30% 103.88% iuh 6.06% Working 3 iuf = (1 + ih) (1 + % change in IQ ) - 1 (1 + % change in IQ ) (1 + ih) 105.1% 2.10% 0.10% 3.88% -0.10% -4.14% Borrow in Swiss Francis and invest in USD Working 2 iuh = (1 + if) (1 + % change in DQ ) - 1 102.1% 1.09% 5.15% 0.79% Working 1 Geo Mean Year 1998 Change in Direct quot -0.10% 1+Change in DQ 99.90% Change in InDirect quo 0.10% 1+Change in IQ 100.10% (1 + if) 2.37% 6.06% Annual Uncovered Rate (for SF) Suggest investment strategy based on IFE Geo Mean 95.86% iuf 0.79% 2000 12.50% 112.50% -12.50% 87.50% 2001 -0.10% 99.90% 0.10% 100.10% Geo Mean 116.43% 84.43% 25.00% 103.88% 25.00% 95.86% 3.88% -4.14% Country Thailand Six-year time period Inflation Rate: US Inflation Rate: Foreign Country 2001 2.80% 2002 1.60% 2003 2.30% 1.7% 0.60% 1.80% Interest Rate: US 3.70% 1.70% 1.20% Interest Rate: Foreign Country 2.10% 1.60% 1.00% % Change in(Indirect quote) 10.70% -3.30% -3.40% % Change in (Direct quote) =[1/(1+% change in IQ]-1 PPP Implications: Annual Uncovered Rate (for US) Annual Uncovered Rate (for THB) 3.22% 1.44% Suggest investment strategy based on IFE Geom Avg Year Change in Indirect quote 1+Change in IQ 2001 10.70% 110.70% 2002 2003 -3.30% -3.40% 96.70% 96.60% Q1. During the assigned time period: US dollar appreciated / depreciated (choose one) in real terms against the currency of foreign country. Answer: According to PPP the country with higher inflation will have its currency depreciate. Comparing the US and Thailand, USD will depreciate b and the fact that nominal interest rate in the US is higher. PPP: (1+Ih/1+If)- 1 ( 1.0259/ 1.0218) - 1 = 0.40% Thai Bat should appreciate 0.40% on average, but in reality the THB appreciated 1.002%, for that reason the Thai Bat is overvalued a IFE: (1+Rh/i+Rf) - 1 (1.0246/1.0220) - 1 = 0.254% Thai Bat should appreciate 0.254% on average, but in reality THB appreciated 1.002%. Therefore, THB is overvalued and USD is und Q2. During the assigned period, what was the average uncovered rate of return from the US viewpoint for the foreign country? Annual Uncovered Rate of Return (from US view point) Ruh = (1 + % change in DQ ) (1 + rf) - 1 (1 + rf) (1 + % change in DQ ) 102.2% 101.00% Ruh 3.22% Q3. During the assigned period, what was the average uncovered rate of return from the foreign country's viewpoint Annual Uncovered Rate of Return (from Thailand view point) Ruf = (1 + % change in IQ ) (1 + rh) - 1 (1 + Rh) (1 + % change in IQ ) 102.5% 99.01% Ruf 1.44% Q4. Based on your answers to questions 2 and 3, given perfect hindsight about interest rates and exchange rate chang Invested/ borrowed (choose one) in the US and invested / borrowed (choose one) in foreign country. Answer: Borrowed in the US and invested in Thailand Q5. Assume that you could both borrow and invest at the average interest rates prevailing in foreign country and in th Also assume that you have a line of credit for one million dollars in the US or an equivalent amount in foreign countr Given perfect hindsight about interest rates and exchange rate changes, please calculate your total profit in dollars usi uncovered interest arbitrage during the assigned time period if you followed the strategy chosen in Q4. Answer: Estimated profit is (3.22% - 2.46%) of 1,000,000 which is equal to .76%* 1,000,000 = $7,600 Thailand 2004 2.70% 2005 3.40% 2006 3.20% 2.8% 4.6% 4.6% 1.60% 3.50% 5.20% 1.80% 3.80% 4.90% -3.10% -0.10% -5.90% Geom Avg. 2.59% 2.18% 2.46% 2.20% -0.9917% 1.002% 3.22% 1.44% 0.17 2004 2005 2006 -3.10% -0.10% -5.90% 96.90% 99.90% 94.10% Geom Avg. -0.9917% f foreign country. S and Thailand, USD will depreciate because of the relative higher inflation t reason the Thai Bat is overvalued and USD is undervalued. e, THB is overvalued and USD is undervalued, ruh= 3.22% > rh= 2.46% Borrow in USD Invest in THB This strategy will work since return is higher the foreign country's viewpoint? ruf= 1.44%