Microsoft Word - questions

Instructions for the project:

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 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 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.

I NEED THE ANSWER TO QUESTION #5. Please let me know if I did the other questions correct. Thank you.

FIN 4375 FINAL PROJECT Work Sheet: Statistical Report Country Five-year time period Inflation rate: US Inflation Rate: Foreign Country Interest Rate: US Interest Rate: Foreign Country % Change in DKK SR ( Indirect quote) % Change in DKK SR ( Direct quote) [ 1/(1 + % change in IQ)] -1 Denmark 1998 1999 1.5 1.8 5.5 4.1 1.4 2000 2.2 2.5 5.3 3.3 4.2 3.4 2.9 6.5 4.9 15.9 PPP Implications: Annual Uncovered Rate ( For US) Annual Uncovered Rate ( For Denmark) Suggest investment strategy based on IFE: Work Sheet: Statistical Report Country Five-year time period Inflation rate: US Inflation Rate: Foreign Country Interest Rate: US Interest Rate: Foreign Country % Change in DKK SR ( Indirect quote) % Change in DKK SR ( Direct quote) [ 1/(1 + % change in IQ)] -1 PPP Implications: Annual Uncovered Rate ( For US) Annual Uncovered Rate ( For Denmark) Suggest investment strategy based on IFE: Denmark 1998 0.015 0.018 0.055 0.041 0.014 -0.014 1999 0.022 0.025 0.053 0.033 0.042 -0.040 2000 0.034 0.029 0.065 0.049 0.159 -0.137 -0.003 0.003 -0.003 0.003 0.005 -0.005 Ruh = 3.88% Rh = 3.96% Ruh