Please answer the following ve 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 prot in dollars using uncovered interest arbitrage during the assigned time period if you followed the strategy chosen in Q4. Geometric and Arithmetic Means of Rates and Percentages If the rates for years 1, 2, 3, N are R., R2, R3, RN , then you can calculate the arithmetic and geometric mean or averages of these rates over the N years, as follows: Arithmetic Mean (R1 + R2 + R3 + .. + RN ) I N Geometric Mean [(1+Rl )* (1+ Rz)* (1+ R3 ) * **(l+ RN) ]\"N - 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 ve year period (2000-2004) : ----- Our estimate of the average rate of retln'n 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)*(l + 0.23)*(l + 0.07) ]\"5 - 1 = (1.02746672)\"S - l = 0.04973 = 4.973% 4.973 % is a more accurate measure of the average return over the 2000-04 period than 5.45% 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 IQ)] - 1 PPP Implications: Annual Uncovered Rate (for US) Annual Uncovered Rate (for Canada) Suggest investment strategy based on IFE:Consumer Price Index 2006 2007 2004 2005 Percent change from year ago 1999 2001 2002 2003 1995 1996 1998 2000 1997 2. 2.7 3.5 2.3 4.5 3.0 2.8 0.S 1.5 4.6 2.6 0.2 2.2 Australia 1.3 2.1 1.7 1.8 0.5 2.0 1.2 2.1 Austria 1.6 2.8 1.9 2.2 2.0 2.7 2.5 2.3 Canada 2.1 1.6 1.0 3.0 3.4 4.4 25 2.8 1.1 51 3.8 36 74 6.1 4.8 1.2 3.9 1.8 1.5 Chile 8.2 0.8 2.8 0.9 1.4 0.3 0.5 8.3 1.9 1.7 China 17.1 1.8 2.4 2.1 1.8 2.5 2.9 2.4 2.1 Denmark 2.1 2.1 2.2 2. 2.2 2.2 2.2 2.4 2.3 2.1 2.1 1.7 1.2 1.3 1.6 Euro Area 2.6 1.3 0.8 2.7 2.0 1.1 1.2 1.3 2.9 0.4 1.9 1.6 Finland 1.8 1.8 1.9 2.2 2.1 1.3 0.7 1.8 2.3 France 1.C ).6 0.6 1.4 1.9 1.4 1.2 1.5 3.3 3.0 Germany 3.9 3.4 3.0 3.5 3.7 7.9 4.5 2.9 5.4 10.5 13.1 6.4 Greece 3.6 6.2 20.5 3.7 11.5 1.9 8.0 6.2 58.4 2.7 Indonesia 2.2 2.9 1.0 4.0 2.5 5.3 47 2.2 1.3 2.1 2.1 0.5 Ireland 5.7 0.7 -0.4 1.1 1.1 11.3 9.0 5.5 5.2 2.0 srael 10.0 2.8 2.2 2.2 2.6 2.0 7 2.6 2.3 5.4 4.0 1.9 0.1 Italy -0.9 -0.2 -0.0 -0.3 0.2 0.7 0.3 -0.7 0.8 2.5 Japan -0.1 0.1 1.8 2.2 4.4 7.5 2.3 1.0 2.8 3.5 2.8 45 19 3.6 2.0 Korea .8 1.0 3.0 .4 2.7 5.3 2.7 1.5 3.4 47 3.6 Malaysia 3.5 4.5 4.0 4.0 15.9 16.6 9.5 6.4 5.0 34.4 1.6 Mexico 35.0 20.6 1.7 5.1 3.9 2.2 1.4 2.0 1.5 1.8 2.3 1.9 3.4 Netherlands 23 3.0 2.4 1.4 2.6 2.6 2.7 1.8 1.2 .3 0.1 3.8 2.3 2.3 0.7 New Zealand 1.3 2.5 0.5 2.3 3.1 1.2 2.6 2.3 7.6 3.3 2.8 Norway 2.4 3.8 3.6 0.2 3.0 5.9 5.9 9.7 67 Philippines 8.0 9.0 0.5 1.6 0.5 LO 2.1 .0.4 2.0 -0.3 0.0 1.4 1.4 1.6 7.1 Singapore 1.7 5.9 1 4 3.4 5.3 5.7 74 8.6 6.9 3.6 2.8 South Africa 8.7 3.6 3.1 3. 3.4 3.5 4.6 3.6 1.9 1.8 2.2 0.5 1.4 2.2 Spain 0.9 2.4 2 2 1.9 0.7 0.3 0.5 07 Sweden 2.5 0.6 0.8 1.2 1.1 1.6 1.0 0.6 1.8 0.8 0.5 0.0 0.8 2.8 4.6 1.6 2.2 Switzerland 0.6 1.8 1.7 5.8 8.1 0.3 1.6 5.8 5.6 8.2 9.6 8.8 Thailand 45.0 21.6 8.6 85.7 34.6 64.9 54.9 54.4 19.1 80.4 23 2.3 Turkey 3 1.4 1.3 2.1 0.8 1.2 1.8 2.7 3.4 3.2 2.9 United Kingdom 1.6 2.3 2.7 18.7 United States 2.4 2.3 1.5 2.2 3.4 2.8 22.4 31.1 21.7 16.0 13.6 23.6 16.2 12.5 60.0 99.8 50.0 35.8 VenezuelaExchange Rates Percent appreciation (+) or depreciation (-) of the U.S. dollar against the local currency 2002 2003 2004 2005 2006 2007 1995 1996 1997 1998 1999 2000 2001 -10.1 18.1 2.4 11.0 12.5 4.9 -16.7 11.5 -3.4 1.2 Australia 1.3 5.3 5.3 0.1 -0.0 4.3 1.4 -10.8 7.1 6.9 -6.4 -5.3 0.7 1.6 7.1 Canada 0.5 6.1 17.7 8.5 0.4 -11.8 -8.2 -5.3 -1.5 Chile 5.6 3.9 1.7 g.8 10.5 -0.0 -1.0 -2.7 -4.6 -3.1 0.4 0.2 0.3 0.0 -0.0 0.0 China 0.2 0.0 5.3 -16.6 -9.0 0.1 -0.9 -8.4 Denmark -11.8 3.5 13.9 1.4 42 15.9 2.9 5.3 -16.5 -9.0 -0.1 -0.9 -8.4 2.3 13.9 1.6 4.4 15.5 3.1 Euro Area .8.7 42 8.6 -5.6 -0.2 -7.9 4.1 12 24.2 244.2 -21.6 7.2 21.8 9.3 Indonesia 0 1 0.7 -7.8 10.2 8.9 1.5 3.1 12.7 3.9 1.6 Israel 0.0 6.0 8.1 6.7 1.8 1.2 -7.9 15.6 1.3 B.O .13.1 5.2 12.7 3.1 -7.5 Japan 4.7 3.9 -10.6 6.8 -2.6 18.5 17.2 -15.3 4.9 14.2 3.2 Korea 4.2 4.2 0.0 0.0 0.0 -0.0 0.0 0.3 -3.2 -6.3 39.3 -3.2 Malaysia 4.4 0.3 12.0 11.7 4.6 -3.4 0.0 0.3 1.2 3.4 90.2 15.4 4.6 Mexico 18.4 4.2 -1.1 -12.4 -5.7 8.4 -11.7 3.8 23.4 1.4 15.9 8.7 -9.5 -20.2 New Zealand 9.5 4.6 0.5 -8.7 3.3 12.9 2.1 -11.2 -11.4 4.8 4.4 Norway -10.2 1.9 6.8 -10.1 14 13.1 15.4 1.2 5.0 3.4 -1.7 Philippines -2.7 124 38.8 -2.7 -3.0 -1.5 -4.6 -5.2 Singapore -7.2 -0.5 5.4 12.5 1.4 1.8 3.9 -0.1 10.6 13.6 24.2 21.9 -28.2 -14.7 -1.4 6.4 4.2 South Africa 2.1 18.5 7.2 20.0 -16.9 -9.1 1.7 -1.3 -8.4 3.9 11.0 12.7 -6.0 Sweden -7.5 6.0 13.9 4.1 -4.3 12.5 -13.6 -7.6 0.3 0.6 0.1 -7.8 Switzerland -13.5 4.6 17.3 0.1 3.7 .69 -15.0 10.7 3.3 34 -0.1 Thailand -0.9 1.7 72.5 33.0 6.2 -8.8 19.3 96.0 23.0 -0.4 5.0 -5.7 6.3 54.8 77.6 86.6 71.7 60.6 Turkey -10.8 0.7 1.3 -7.9 6.7 5.3 4.2 -8.1 United Kingdom 2.9 1.1 -4.7 1.2 1.5 -12.3 8.2 -5.6 4.9 6.0 1.9 -1.5 1.6 United States 5.6 4.5 7.7 4.8 38.4 17.7 10.5 2.7 0.0 19.0 136.1 17.1 12.0 10.6 12.3 6.5 60.4 Venezuela Percent appreciation (+) or depreciation (-) of the U.S. dollar against a group of currenciesShort-Term Interest Rates 2006 2007 2003 2004 2005 Annual percent 1998 1999 2000 2001 2002 1995 1996 1997 5.0 3.7 5.0 Australia 7.2 5.4 5.0 7.7 1.8 2.7 2.6 5.2 2.1 5.0 5.1 2.9 Canada 5.9 3.1 5.6 2.7 14.9 8.6 6.2 13.7 13.5 12.0 Chile 3.3 2.7 3.2 3.2 2.7 8.6 4.6 3.2 China 10.4 9.0 3.1 1.3 2.4 2.1 3.7 1.1 3.3 Denmark 6.1 3.1 4.3 2.1 2.2 3.0 Euro Area 6.8 5.1 6.4 3.1 11.4 8.0 12.5 15.5 15.5 10.6 39.1 25.7 Indonesia 16.7 17.3 20.0 5.5 70 3.8 74 14.4 15.3 13.4 11.3 11.4 Israel 0.7 0.0 0.0 0.0 0.1 0.1 0.6 0.2 Japan* 1.2 0.6 4 8 3.7 3.4 4.2 2 17 1.2 5.0 Korea 12.6 12.4 13.3 15.0 3.2 3.4 2.8 2.7 2.8 2.4 6.4 6. 3.5 2.9 Malaysia 5.5 6.4 7.7 7.8 7.2 7.4 13.4 48.2 329 22.3 27.1 24.6 17.2 Mexico 7.5 8.3 54 7.1 4.8 5.7 5.7 9.3 7.7 7.3 New Zealand 9.0 2.2 5.7 3.9 1.1 2.C 3.1 7.2 3.7 5.8 Norway 5.5 3.4 713 6.1 12.3 12.9 15.0 10.0 Philippines 11.8 1.0 0.7 2.3 3.5 2.7 2.6 2.0 2.6 2.9 4.4 5.0 2.0 Singapore 9.1 11.2 10.7 75 73 15.3 16.5 12.9 10.1 9.7 South Africa 13.5 15.0 3.6 3.0 2.1 12 3.1 40 10 Sweden 8.7 2 6 14 3.2 29 Switzerland 2.9 1.8 3.8 4.9 3.2 2.1 10.3 12.1 21.7 12 1.7 Thailand 23.8 15.6 17.9 18.2 73.5 38.9 92.4 59.5 38.5 Turkey 72.3 76.2 70.3 74.6 6.0 5.0 4.0 3.7 4.6 4.7 5.4 6.1 United Kingdom 6.7 6.0 6. 7.3 5.2 5.3 5.3 6.5 3.7 1.2 United States 5.4 5.6 5.5 5.9 28.5 28.5 40.0 28.5 28.5 28.5 45.0 60.0 38.0 38.0 37.0 45.0 Venezuela 49.0 The actual value for 2003 is 0.037; the actual value for 2004 is 0.029; the actual value for 2005 is 0.029