Provide the solutions.
2. The data below is taken from the BOP of Switzerland. Based on this data, decide whether the following statement is true or false and explain your answer. "From 1979 to 1982, foreigners have been net issuers of SF-denominated bonds in the Swiss capital markets." 1979 1980 1981 1982 Portfolio investment (in billions of dollars) -11.8 -11.8 -11.9 -32.23. A company in Philadelphia purchases machinery from a Canadian company for usD 150 and receives one-year trade credit. The machinery is transported to Philadelphia by a Canadian trucking company that charges the US company usn 10. The US company insures the shipment with a US insurance company and pays a premium of usp 3. After delivering the machinery to Philadelphia, the Canadian truck continues its trip to Houston, where it picks up micro- computers sold by a Texan company to a Mexican company. This shipment, which is worth usn 170, is insured by a US insurance company for a premium of usp 4. No trade credit is given to the Mexican company. Compute the BOP for the US and assume that Canadian and Mexican companies maintain dollar deposits in New York.True-False Questions 1. If a country has a BOP deficit, the total of all BOP subaccounts is negative. 2. The current account is a record of all trade in goods and services, while the capital account is a record of direct and portfolio investment and unilateral transfers. 3. When the us private sector purchases more goods or makes more investments abroad than foreigners purchase or invest in the us during a year, the Federal Reserve (the us central bank) must make up for the shortfall. 4. All errors and omissions in the BOP are a result of black market transactions. 5. When a corporation purchases a company abroad, and the value of the firm appreciates over time, the NII and the capital account of the BOP is updated to reflect this change. 6. The BOP theory of exchange rate determination says that most changes in the exchange rate are due to the arrival of new information about the future. 7. Under a fixed exchange rate regime, if a country's private sector sells abroad more than it purchases, the central bank must sell foreign exchange. 8. BOP theory is flawed is because it assumes that investors only invest in risk- free domestic and foreign assets.6. The software giant, Kludge Systems, has issued a bond that gives the holder the choice between uso 10,000, NZD 20,000, and GBP 5,000. Can Kludge's bond be replicated using simple options?7. You have purchased a zero-coupon EUR bond that gives you the choice be- tween EUR 100,000 at T2 = 2 or EUR 90,000 at T1 = 1. (a) What options (put and/or call) are implicit in this bond? (Hint: there are two correct descriptions.) (b) Show that the two equivalent views of this instrument are an application of Put Call Parity.8. The lower bound on a non-degenerate American-style put (that is, a put where there is still some uncertainty about whether Sr > X or not) is: X Assume that ST = 0 and ry = 0. Common sense says that you should exercise the put, since the exchange rate cannot fall any further. Yet the bound P, > X says that the put should trade above its intrinsic value. Where is the fallacy?If at ST = 24 the call is almost a forward purchase contract (so that the call is priced close to its lower bound'), its value still exceeds the intrinsic value, and exercise is never optimal. An American call will therefore be priced as if it were European. In this example, the reason is that the foreign interest rate is far below the domestic rate. For the put, first look at the values of comparable forward sales contracts, and these are the same as the above values of the purchase contracts, except for the sign. The non-negativity bound yields the following floor for our various put prices: S= 18 20 22 24 lower bounds: life = 12 months 0.99 0 0 6 months 1.86 0 0 0 3 months 2.39 0.44 0 0 1 month 2.79 0.8 intrinsic value: 3 1 0 0 If, for instance, at S, = 18 the (European) put is nearly degenerate and therefore trades near the value of a forward sales, its value would be below the intrinsic value. Given this, an American put would already have been exercised. Therefore, early exercise of the put does not have an ex ante probability equal to zero, and all "alive" American puts must trade above European put prices. If the foreign rate had far exceeded the domestic interest rate, you would not have observed this
