NOTE: ASSIGNED FOREIGN COUNTRY IS Venezuela 2001-2006

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.

NOTE: ASSIGNED FOREIGN COUNTRY IS Venezuela 2001-2006

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.