Microsoft Word - Assignment1QA.docx

1. (A)CalculatetheAustraliandollarprice(on1July2016)ofoneunitofKoreancurrency(roundingto4decimalplaces)
2. (B) What is the total price of the computers in Australian dollars on 1 July 2016 (rounding to 2 decimal places)?
3. (C) Calculate the 6-month forward exchange rate, FKRW/$, under the covered interest parity (rounding to 2 decimal places). Note that the forward rate is defined as the Korean won per AU$1. Hint: Use the CIP equation.
4. (D)WhatwouldyouadviseyourfirmtodotoavoidalossonthedealiftheKoreanwoncosts5%morecomparedtotheAustraliandollar(theexpecteddepreciationrateofAustraliandollaragainstKoreanwonis5%)whenpaymentisdueon1December2016?Theanswershouldhavetheexactnumbers(roundingupto2decimalplaces)thatyouwouldtellyourCEO.Hint:Youwanttogetridoftheexchangeraterisks.

2. Suppose a basket of goods costs 210,000 Mexican pesos in Mexico, while the same basket costs $16,800 in Australia. The nominal exchange rate is currently at E$/Peso = 0.10. Assume that the prices in two countries do not change at all over time (the inflation rates in two countries are always zero). Assume that the uncovered interest parity (UIP) holds.

(A) Calculate the real exchange rate, q$/Peso. Hint: Use the real exchange rate definition.

(B) Underthepurchasingpowerparity(PPP),whatwillbethenominalexchangerateinthelongrun? Hint: Use the real exchange rate definition and apply the PPP.

(C) IstheAustraliandollarunderorovervaluedagainstMexicanpesosatthemoment?

Hint: Check the definition of the under/over valuation of a currency.

(D) The nominal exchange rate in 1 year is expected to become Ee$/Peso = 0.097. Using the definition of the real exchange rate with zero inflation rates in two countries, calculate the expected real exchange rate in 1 year, qe$/Peso. Hint: Check the definition of the real exchange rate in growth rates and apply the inflation rates given.

(E) The exchange rate in 1 year is expected to be 0.097, Ee$/Peso = 0.097 as in (D), the current 1- year interest rate in Australia is 2%, and the 1-year forward rate is F$/Peso = 0.10. If you can borrow $1 million from a bank in Australia or 10 million pesos from a bank in Mexico, explain how you can make money without any exchange rate risks. The answer should have the specific amount of profits in Australian dollars in 1 year.

Hint: Check the UIP equation and find the interest rate in Mexico. Then, apply the way to make

money when the CIP does not hold.

_________________