NOTE: ASSIGNED FOREIGN COUNTRY IS:China 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 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.

*THE CHART ON THE BOTTOM OF "CANADA" IS A TEMPLATE FOR ONE OF THE QUESTIONS

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

Reference Tables International Economic Trends Consumer Price Index Percent change from year ago 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Australia 4.6 2.6 0.2 0.9 1.5 4.5 4.4 3.0 2.8 2.3 2.7 3.5 2.3 Austria 1.6 1.8 1.2 0.8 0.5 2.0 2.3 1.7 1.3 2.0 2.1 1.7 2.2 Canada 2.1 1.6 1.6 1.0 1.7 2.7 2.5 2.3 2.8 1.9 2.2 2.0 2.1 Chile 8.2 7.4 6.1 5.1 3.3 3.8 3.6 2.5 2.8 1.1 3.0 3.4 4.4 China 17.1 8.3 2.8 -0.9 -1.4 0.3 0.5 -0.8 1.2 3.9 1.8 1.5 4.8Reference Tables International Economic Trends Exchange Rates Percent appreciation (+) or depreciation (-) of the U.S. dollar against the local currency 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Australia -1.3 -5.3 5.3 18.1 -2.4 11.0 12.5 -4.9 -16.7 -11.5 -3.4 1.2 -10.1 Canada 0.5 -0.7 1.6 7.1 0. 1 -0.0 4.3 1.4 -10.8 -7.1 -6.9 -6.4 -5.3 Chile -5.6 3.9 1.7 9.8 10.5 6.1 17.7 8.5 0.4 -11.8 -8.2 -5.3 -1.5 China -3.1 -0.4 -0.2 -0.2 -0.3 0.0 -0.0 0.0 0.0 -0.0 -1.0 -2.7 -4.6\fWork Sheet: Statistical Report Country CANADA Four-year time period 1998 1999 2000 2001 Geom Avg Inflation Rate: US 1.6 2.2 3.4 3.3 Inflation Rate: Foreign Country 1.0 1.7 2.7 2.9 Interest Rate: US 5.5 5.3 6.5 4.8 Interest Rate: Foreign Country 5.0 4.9 5.7 8.3 % Change in CD SR (Indirect quote) 7.10 0.10 0.00 -2.30 % Change in CD SR (Direct quote) = [1/(1 + % change in IQ)] - 1 PPP Implications: Annual Uncovered Rate (for US) Annual Uncovered Rate (for Canada) Suggest investment strategy based on IFE