I was assigned Turkey 2001-2006
Instructions for the project: FIN 4375 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 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 geometrie 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. 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 uncovered 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 credit 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 Country CANADA Four-year time period 1998 1999 2000 2001 Geom Avg Inflation Rate: US 1.5 2.2 3.4 2.8 Inflation Rate: Foreign Country 1.0 1.7 2.7 2.5 Interest Rate: US 5.5 5.3 6.5 3.7 Interest Rate: Foreign Country 5.0 5.2 5.8 2.1 % Change in CD SR (Indirect quote) 7.10 0.10 0.00 4.3 % Change in CD SR (Direct quote) = [1/(1+% change in IQI - 1 PPP Implications: Annual Uncovered Rate (for US) Annual Uncovered Rate (for Canada) Suggest investment strategy based on IFE: Geometric and Arithmetic Means of Rates and Percentages If the rates for years 1, 2, 3 ... N are R, R., R..... Ry, then you can calculate the arithmetic and geometric mean or averages of these rates over the N years, as follows: Arithmetic Mean (R, + R, + R,+ .. + R)/N Geometric Mean (1+R, )* (1+R,)* (1+R, ) * **(1+R, DIN-1 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): 2002 2005 2000 4.75 % Rates of return 2001 -8% 2003 23% 0.5% 7% Our estimate of the average rate of return over the 2000-04 period based on: Arithmetic Mean = (0,0475 -0.08 +0.005 +0.23 +0.07)/5 -0.0545 - 5.45% Geometric Mean -[(1+0.0475)*(1 -0.08)*(1 +0.005)*(1 +0.23)*(1 +0.07) 1" - 1 -(1.02746672)5.1 0.04973 - 4.973% 4.973 % is a more accurate measure of the average return over the 2000-04 period than 5.45% Reference Tables International Economic Trends Consumer Price Index Percent change from year ago 1985 1990 Australia 2.8 1097 1990 1900 2000 2001 2009 2003 2004 2005 2007 46 02 0.9 1.5 45 44 30 28 2.3 35 1.6 18 12 OB 0.5 20 23 1.7 13 2.0 21 1.7 Austria Canada 22 2.1 1.6 16 10 1.7 27 25 23 28 1.9 22 21 Chile 8.2 7.4 2.0 3.4 5.1 33 3.5 25 1.1 20 44 17.1 83 28 09 03 05 12 3.9 18 15 48 China Denmark Euro Area 2.1 2.1 22 18 25 29 24 24 2.1 12 26 2.1 12 1.1 22 24 23 2.1 2.1 22 22 21 Finland 0.4 1.1 1.2 1.3 1.3 29 27 20 13 0.1 08 13 16 18 21 1.3 07 0.6 18 18 1.9 22 23 19 France Germany 15 1.2 1.5 0.6 1.4 1.9 1.4 1.0 18 19 18 23 Greece 7.9 5.4 45 2.1 29 37 39 34 3.0 35 Indonesia 8.0 62 58.4 20.5 3.7 115 119 6.6 5.2 105 13.1 64 brand 22 13 2.1 25 53 40 22 27 100 11.3 90 55 1.1 1.1 57 0.7 -0.4 13 2.1 05 5.4 19 20 17 26 23 28 23 22 22 20 -01 0.1 18 0.7 03 -0.7 -0,8 09 -02 -0.0 03 02 0.1 Korea 45 49 4.4 75 0.8 40 28 35 3.6 28 22 25 Malaysia 34 35 2.7 5.3 27 1.5 18 1.0 15 30 35 20 Mexico 35.0 3444 20.6 159 16.5 95 6.4 5.0 45 47 40 35 14 15 19 1B 20 23 5.1 39 22 14 15 1.6 Netherlands New Zealand 3.8 23 12 13 -01 26 26 27 16 23 30 Norway 1.2 20 23 23 31 30 25 0.5 Philippines 20 59 27 30 36 5.9 63 28 17 1.4 20 0.0 1.4 10 04 05 1.6 05 10 2.1 Singapore South Africa 86 69 5.2 53 57 59 14 45 7.1 36 19 22 35 28 36 2.1 3.1 34 20 Spain Sweden 2.5 05 0.7 -0.3 0.5 0.9 2.4 19 0.4 05 22 18 0.5 16 10 08 12 1.1 0:7 Thailand 58 58 5.6 8.1 03 16 1.7 06 18 28 45 45 22 304 857 546 549 544 21.6 86 82 26 Be U Kango 25 18 16 1.3 08 1.2 13 14 13 21 23 23 28 23 15 22 14 26 1.6 23 27 34 600 500 358 226 125 224 311 217 Reference Tables International Economic Trends Exchange Rates Percent appreciation (*) or depreciation () of the US dollar against the local currency 1997 1990 2000 2002 2003 2004 1995 -1.3 1995 -53 2005 1900 24 2006 2007 Australia 2001 125 5.3 18.1 11.0 45 -16.7 - 11.5 1.2 -10.1 Canada 05 -0.7 1.6 0.1 -0.0 1.4 - 10.8 -6.9 -53 Chile -5.6 ag 1.7 98 10.5 177 85 04 -11.8 -82 -5.3 -15 3.1 -0.4 -02 -0.2 00 -0.0 00 0.0 -00 -1.0 27 -4.6 China Denmark Euro Area -11.8 3.5 139 1.4 42 15.9 2.9 -5.3 -16.6 -9.0 0.1 -09 -8.4 -8.7 23 13.9 1.6 4.4 15.5 3.1 -53 -16.5 -9.0 -0.1 -09 -8.4 Indonesia 4.1 42 242 2442 21.6 72 21.8 -9.3 -7.9 42 8.6 -5.5 -02 Israel 00 6.0 8.1 102 8.9 -1.5 3.1 127 -16 0.1 -0.7 15.6 113 8.0 -13.1 5.2 127 31 -75 -6.7 18 5.6 12 4.2 185 47.2 -15.3 4.9 142 -32 -4.7 39 -10.6 -6.8 -26 -4.4 0.3 120 39.3 32 0.0 0.0 0.0 -0.0 0.0 03 3.2 -63 902 18.4 15.4 4.6 -1.1 -12 11.7 46 3.4 0.0 0.3 -95 -4.6 38 23.4 1.4 15 9 8.7 -95 -202 -124 -5.7 8.4 -102 1.9 9.6 6.6 3.3 12.9 21 -112 -11.4 48 4.4 -05 -8.7 -27 20 12.4 38.8 -44 13.1 15.4 1.2 5.0 2.4 -1.7 -6.8 - 10.1 Japan Korea Malaysia Mexico New Zealand Norway Philippines Singapore South Africa Sweden Switzerland Thailand Turkey United Kingdom United States -72 -0.5 5.4 125 14 18 39 -0.1 -2.7 3.0 -15 -52 2.1 18.5 7.2 20.0 106 13.6 24.2 219 -282 -14.7 -1.4 5.4 42 -7.5 -60 139 39 110 12.7 60 -189 9.1 1.7 -1.3 -135 46 173 -0.1 37 125 0.1 -78 -13,6 -76 03 0.6 43 -0.9 1.7 225 33.0 -83 10.7 3.3 3.4 3.1 -0.1 -59 -15.0 548 77.6 566 71.7 606 493 96.0 230 -0.4 -50 -57 63 -8.8 1.1 24 6.7 5.3 -8.1 -10.8 0.7 -13 -79 -5.6 77 -16 60 -15 -123 -82 -1.9 -1.5 -5.6 Vens. 190 136.1 17.1 120 106 123 6.5 604 38.4 177 10.5 27 0.0 Percent preciation (e) or depreciation of the U.S. daganat a group of currencies International Economic Trends Reference Tables Short-Term Interest Rates Annual percent 1995 1996 1907 1998 1990 2000 2001 2002 2000 2004 2007 Australia 7.7 72 5.4 5.0 5.0 62 49 4.7 49 55 5.6 60 6.7 Canada 5.9 3.1 4.6 5.0 52 5.8 2.1 29 27 35 43 26 19 Chile 13.7 13.5 12.0 14.9 8.6 92 6.2 3.8 27 39 5.1 56 China 104 9.0 8.6 4.6 32 32 32 27 27 23 3.3 3.3 33 Denmark 8.1 3.9 3.7 4.1 3.3 49 45 3.5 24 2.1 22 3.1 43 Euro Area 6.8 5.1 4.4 4.0 3.0 44 43 33 23 21 22 3.1 43 Indonesia 16.7 17.3 200 39.1 257 125 155 15 5 10.5 6.4 11.4 8.0 14.4 15.3 13.4 113 6.5 7.4 7.0 48 43 5.5 Japan" 1.2 0.6 0.6 0.7 0.2 02 0.1 0.1 0.0 0.0 0.0 0.2 0.7 Korea 126 124 15.0 5.0 52 47 40 27 42 Malaysia 5.5 6.4 5.9 325 29 28 27 28 24 25 32 24 Mexico 48.2 329 223 27.1 246 172 134 8.5 72 7.4 7.7 7.8 9.0 93 77 73 4.8 65 5.7 5.7 5.4 6.1 75 83 New Zealand Norway 55 3.7 5.8 65 6.7 72 $9 4.1 20 22 31 5.0 11.8 123 129 15.0 10.0 9.9 9.7 5.5 5.9 7.3 6.1 53 3.4 Philippines Singapore 26 29 5.0 20 26 20 10 0.7 23 35 27 South Africa 13.5 150 15.3 16.5 12.9 10.1 9.7 112 10.7 75 G 73 9.1 Sweden 8.7 5.8 3.1 4.0 4.1 2.0 21 1.7 Switzerland 29 2.0 16 15 1.4 29 1.1 0.3 OS 08 16 2.6 10.3 12.1 217 26 1.2 17 21 10 38 32 Thailand Tuy 723 76.2 70.3 746 73.5 389 595 38.5 238 15.6 179 182 United Kingdom 6.7 60 6.8 73 5.4 6.1 50 40 3.7 46 47 United States 59 54 5.6 5.5 6.5 3.7 1.7 1.2 15 35 52 5.3 Venezia 49.0 45.0 45.0 600 380 38.0 370 40.0 28.5 285 285 28.5 28.5 "The actual value for 2005 0.039, the actual value for 2004 is 0.008, the actual value for 2005 is 0.029 Turkey 2001-2006 Instructions for the project: FIN 4375 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 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 geometrie 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. 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 uncovered 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 credit 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 Country CANADA Four-year time period 1998 1999 2000 2001 Geom Avg Inflation Rate: US 1.5 2.2 3.4 2.8 Inflation Rate: Foreign Country 1.0 1.7 2.7 2.5 Interest Rate: US 5.5 5.3 6.5 3.7 Interest Rate: Foreign Country 5.0 5.2 5.8 2.1 % Change in CD SR (Indirect quote) 7.10 0.10 0.00 4.3 % Change in CD SR (Direct quote) = [1/(1+% change in IQI - 1 PPP Implications: Annual Uncovered Rate (for US) Annual Uncovered Rate (for Canada) Suggest investment strategy based on IFE: Geometric and Arithmetic Means of Rates and Percentages If the rates for years 1, 2, 3 ... N are R, R., R..... Ry, then you can calculate the arithmetic and geometric mean or averages of these rates over the N years, as follows: Arithmetic Mean (R, + R, + R,+ .. + R)/N Geometric Mean (1+R, )* (1+R,)* (1+R, ) * **(1+R, DIN-1 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): 2002 2005 2000 4.75 % Rates of return 2001 -8% 2003 23% 0.5% 7% Our estimate of the average rate of return over the 2000-04 period based on: Arithmetic Mean = (0,0475 -0.08 +0.005 +0.23 +0.07)/5 -0.0545 - 5.45% Geometric Mean -[(1+0.0475)*(1 -0.08)*(1 +0.005)*(1 +0.23)*(1 +0.07) 1" - 1 -(1.02746672)5.1 0.04973 - 4.973% 4.973 % is a more accurate measure of the average return over the 2000-04 period than 5.45% Reference Tables International Economic Trends Consumer Price Index Percent change from year ago 1985 1990 Australia 2.8 1097 1990 1900 2000 2001 2009 2003 2004 2005 2007 46 02 0.9 1.5 45 44 30 28 2.3 35 1.6 18 12 OB 0.5 20 23 1.7 13 2.0 21 1.7 Austria Canada 22 2.1 1.6 16 10 1.7 27 25 23 28 1.9 22 21 Chile 8.2 7.4 2.0 3.4 5.1 33 3.5 25 1.1 20 44 17.1 83 28 09 03 05 12 3.9 18 15 48 China Denmark Euro Area 2.1 2.1 22 18 25 29 24 24 2.1 12 26 2.1 12 1.1 22 24 23 2.1 2.1 22 22 21 Finland 0.4 1.1 1.2 1.3 1.3 29 27 20 13 0.1 08 13 16 18 21 1.3 07 0.6 18 18 1.9 22 23 19 France Germany 15 1.2 1.5 0.6 1.4 1.9 1.4 1.0 18 19 18 23 Greece 7.9 5.4 45 2.1 29 37 39 34 3.0 35 Indonesia 8.0 62 58.4 20.5 3.7 115 119 6.6 5.2 105 13.1 64 brand 22 13 2.1 25 53 40 22 27 100 11.3 90 55 1.1 1.1 57 0.7 -0.4 13 2.1 05 5.4 19 20 17 26 23 28 23 22 22 20 -01 0.1 18 0.7 03 -0.7 -0,8 09 -02 -0.0 03 02 0.1 Korea 45 49 4.4 75 0.8 40 28 35 3.6 28 22 25 Malaysia 34 35 2.7 5.3 27 1.5 18 1.0 15 30 35 20 Mexico 35.0 3444 20.6 159 16.5 95 6.4 5.0 45 47 40 35 14 15 19 1B 20 23 5.1 39 22 14 15 1.6 Netherlands New Zealand 3.8 23 12 13 -01 26 26 27 16 23 30 Norway 1.2 20 23 23 31 30 25 0.5 Philippines 20 59 27 30 36 5.9 63 28 17 1.4 20 0.0 1.4 10 04 05 1.6 05 10 2.1 Singapore South Africa 86 69 5.2 53 57 59 14 45 7.1 36 19 22 35 28 36 2.1 3.1 34 20 Spain Sweden 2.5 05 0.7 -0.3 0.5 0.9 2.4 19 0.4 05 22 18 0.5 16 10 08 12 1.1 0:7 Thailand 58 58 5.6 8.1 03 16 1.7 06 18 28 45 45 22 304 857 546 549 544 21.6 86 82 26 Be U Kango 25 18 16 1.3 08 1.2 13 14 13 21 23 23 28 23 15 22 14 26 1.6 23 27 34 600 500 358 226 125 224 311 217 Reference Tables International Economic Trends Exchange Rates Percent appreciation (*) or depreciation () of the US dollar against the local currency 1997 1990 2000 2002 2003 2004 1995 -1.3 1995 -53 2005 1900 24 2006 2007 Australia 2001 125 5.3 18.1 11.0 45 -16.7 - 11.5 1.2 -10.1 Canada 05 -0.7 1.6 0.1 -0.0 1.4 - 10.8 -6.9 -53 Chile -5.6 ag 1.7 98 10.5 177 85 04 -11.8 -82 -5.3 -15 3.1 -0.4 -02 -0.2 00 -0.0 00 0.0 -00 -1.0 27 -4.6 China Denmark Euro Area -11.8 3.5 139 1.4 42 15.9 2.9 -5.3 -16.6 -9.0 0.1 -09 -8.4 -8.7 23 13.9 1.6 4.4 15.5 3.1 -53 -16.5 -9.0 -0.1 -09 -8.4 Indonesia 4.1 42 242 2442 21.6 72 21.8 -9.3 -7.9 42 8.6 -5.5 -02 Israel 00 6.0 8.1 102 8.9 -1.5 3.1 127 -16 0.1 -0.7 15.6 113 8.0 -13.1 5.2 127 31 -75 -6.7 18 5.6 12 4.2 185 47.2 -15.3 4.9 142 -32 -4.7 39 -10.6 -6.8 -26 -4.4 0.3 120 39.3 32 0.0 0.0 0.0 -0.0 0.0 03 3.2 -63 902 18.4 15.4 4.6 -1.1 -12 11.7 46 3.4 0.0 0.3 -95 -4.6 38 23.4 1.4 15 9 8.7 -95 -202 -124 -5.7 8.4 -102 1.9 9.6 6.6 3.3 12.9 21 -112 -11.4 48 4.4 -05 -8.7 -27 20 12.4 38.8 -44 13.1 15.4 1.2 5.0 2.4 -1.7 -6.8 - 10.1 Japan Korea Malaysia Mexico New Zealand Norway Philippines Singapore South Africa Sweden Switzerland Thailand Turkey United Kingdom United States -72 -0.5 5.4 125 14 18 39 -0.1 -2.7 3.0 -15 -52 2.1 18.5 7.2 20.0 106 13.6 24.2 219 -282 -14.7 -1.4 5.4 42 -7.5 -60 139 39 110 12.7 60 -189 9.1 1.7 -1.3 -135 46 173 -0.1 37 125 0.1 -78 -13,6 -76 03 0.6 43 -0.9 1.7 225 33.0 -83 10.7 3.3 3.4 3.1 -0.1 -59 -15.0 548 77.6 566 71.7 606 493 96.0 230 -0.4 -50 -57 63 -8.8 1.1 24 6.7 5.3 -8.1 -10.8 0.7 -13 -79 -5.6 77 -16 60 -15 -123 -82 -1.9 -1.5 -5.6 Vens. 190 136.1 17.1 120 106 123 6.5 604 38.4 177 10.5 27 0.0 Percent preciation (e) or depreciation of the U.S. daganat a group of currencies International Economic Trends Reference Tables Short-Term Interest Rates Annual percent 1995 1996 1907 1998 1990 2000 2001 2002 2000 2004 2007 Australia 7.7 72 5.4 5.0 5.0 62 49 4.7 49 55 5.6 60 6.7 Canada 5.9 3.1 4.6 5.0 52 5.8 2.1 29 27 35 43 26 19 Chile 13.7 13.5 12.0 14.9 8.6 92 6.2 3.8 27 39 5.1 56 China 104 9.0 8.6 4.6 32 32 32 27 27 23 3.3 3.3 33 Denmark 8.1 3.9 3.7 4.1 3.3 49 45 3.5 24 2.1 22 3.1 43 Euro Area 6.8 5.1 4.4 4.0 3.0 44 43 33 23 21 22 3.1 43 Indonesia 16.7 17.3 200 39.1 257 125 155 15 5 10.5 6.4 11.4 8.0 14.4 15.3 13.4 113 6.5 7.4 7.0 48 43 5.5 Japan" 1.2 0.6 0.6 0.7 0.2 02 0.1 0.1 0.0 0.0 0.0 0.2 0.7 Korea 126 124 15.0 5.0 52 47 40 27 42 Malaysia 5.5 6.4 5.9 325 29 28 27 28 24 25 32 24 Mexico 48.2 329 223 27.1 246 172 134 8.5 72 7.4 7.7 7.8 9.0 93 77 73 4.8 65 5.7 5.7 5.4 6.1 75 83 New Zealand Norway 55 3.7 5.8 65 6.7 72 $9 4.1 20 22 31 5.0 11.8 123 129 15.0 10.0 9.9 9.7 5.5 5.9 7.3 6.1 53 3.4 Philippines Singapore 26 29 5.0 20 26 20 10 0.7 23 35 27 South Africa 13.5 150 15.3 16.5 12.9 10.1 9.7 112 10.7 75 G 73 9.1 Sweden 8.7 5.8 3.1 4.0 4.1 2.0 21 1.7 Switzerland 29 2.0 16 15 1.4 29 1.1 0.3 OS 08 16 2.6 10.3 12.1 217 26 1.2 17 21 10 38 32 Thailand Tuy 723 76.2 70.3 746 73.5 389 595 38.5 238 15.6 179 182 United Kingdom 6.7 60 6.8 73 5.4 6.1 50 40 3.7 46 47 United States 59 54 5.6 5.5 6.5 3.7 1.7 1.2 15 35 52 5.3 Venezia 49.0 45.0 45.0 600 380 38.0 370 40.0 28.5 285 285 28.5 28.5 "The actual value for 2005 0.039, the actual value for 2004 is 0.008, the actual value for 2005 is 0.029 Turkey 2001-2006
