Questions are based on Thailand time period: 2001-2006.

How do you calculate questions 1-5? Charts are below to help calculate.

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.

The following pages contain annual data on interest rates, ination 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. Work 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:Geometric and Arithmetic Means of Rates and Percentages If the rates for years 1, 2, 3, N are R1, 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 + R, + .. + RN )/ N Geometric Mean [(l+R1 )* (1+ R2 )* (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 return over the 2000-04 period based on: Arithmetic Mean = (0.0475 - 0.08 + 0.005 + 0.23 + 0.07) l 5 = 0.0545 = 5.45% Geometric Mean = [(1+ 0.0475)*(1 - 0.08)*(] + 0,005)*(] + 0230*(1 + 0.07)]1'5 _ 1 = (102746672)"5 - 1 = 0.04973 = 4.973% 4.973 % is a more accurate measure of the average return over the 2000-04 period than 5.45% International Economic Trends Reference Tables Consumer Price Index 2000 2001 2002 2003 2004 2006 1996 1997 1998 1999 1995 2.8 2. 2.7 3.5 2.3 D.9 1.5 Australia 2.6 .2 2.2 2.0 2.3 1.9 2.0 2.1 Austria LE .0 2.5 2. 2.8 1.1 3. 3.4 5.1 3.3 3.8 3.6 8.2 7. 5.1 3.9 4.8 Chile 1.5 1.2 8.3 -0.9 2.3 2.2 2.2 1 1 2.2 2.6 0.1 0.8 1.3 1.6 2.0 1.1 1.2 .3 2.9 2.3 1.9 1.6 1.8 2.2 0.6 France 2.1 1.3 3.3 3.0 2.9 3. 3.5 5.4 6.2 10.5 13.1 64 3.7 11.5 11.9 8.0 6.2 58.4 20.5 2.9 4.0 2. 2.2 2. 5.3 2.2 2.1 2.1 11.3 2.0 2.6 2.3 2.6 2.8 2.2 2.0 0.1 Italy -0.8 0.9 -0.2 -0.3 0.2 0.7 -0.7 Japan -0.1 8 -0.3 3.6 2.5 3.5 2.8 2.2 4.5 4.4 7.5 2.3 Korea 3.0 3.6 2.0 Malaysia 3. 3. 20.6 159 16.6 9.5 35.0 34.4 1.6 2. 5. 1 3. 14 1.5 24 Netherlands 2.6 2.6 .8 2.3 3.0 3.4 .3 New Zealand 3.8 2.3 25 0.5 2.3 3.0 2.3 3. Norway 2.4 1.2 2.6 2.3 76 6 3 30 36 6 7 8.0 9.0 59 0.4 0.5 16 0.5 LO 2.0 0.3 1.4 3.4 4.6 6.9 5.2 5.3 5.7 9.2 6.9 South Africa 7.4 3.6 3.4 3.6 2.8 2.2 3.5 2.8 3.6 3.6 2.2 2.2 0.5 0.5 0.0 1.6 30 0.6 2.8 4.6 1.6 2.2 0. 1.6 Thailand 5.8 5. 5.6 3.1 8.8 54.9 54.4 21.6 8.6 8.2 9.6 64.9 45.0 84.6 89 80.4 85.7 1.3 3.4 3.2 2.8 23 3.4 2.8 2.9 2 2 15 22.4 31.1 21.7 16.0 13.6 18.7 99.8 50.0 35.8 23.6 16.2 12.5 VenezuelaReference Tables International Economic Trends Exchange Rates Percent appreciation (+) or depreciation (-) of the U.S. dollar against the local currency 2004 2005 2006 2007 1995 1996 1997 1998 1999 2000 2001 2002 1.2 -10.1 .5.3 6.3 18.1 2.4 11.0 12.5 4.9 -16.7 3.4 1.3 10.8 -7.1 69 6.4 -5.3 Canada -0.7 -0.0 0.5 5.3 -1.5 BE 17.7 8.5 0.4 -11.8 8.2 Chile .5.6 3.9 -0.0 1.C .2.7 -4.6 -3.1 -0.4 0.2 0.2 0. O. -0. 4.2 15.9 5.3 -16.6 -9.0 0.1 -8.4 -11.8 35 13.9 15.5 5.3 -16.5 9.0 0.1 .0.9 -8.4 Euro Area 8.7 2.3 13.9 6 7.2 21.8 9.3 -7.9 4.2 5.6 -0.2 4.1 4.2 24.2 -21.6 Indonesia 7.8 3.0 3.1 10.2 8.9 1.5 12.7 3.9 1.6 0.0 -7.5 -6.7 5.6 1.2 .7.9 15.6 11.3 8.0 -13.1 -5.2 12.7 -2.6 3.2 -3.9 10.6 4.2 4.2 18.5 47.2 15.3 4.9 14.2 0.0 -0.C 0.0 -0.3 3.2 -6.3 12.0 3.2 Malaysia 0.3 39.3 0.0 4.6 34 11.7 16 3.4 0.3 90.2 18.4 42 154 9.5 -20.2 -12.4 -5.7 8.4 -11.7 4.6 3.8 15.9 3.7 9.5 23.4 12.9 -11.4 4.8 -0.5 -8.7 3.3 2. 11.2 -4.4 Norway -10.2 9.6 6.6 5.0 68 -10.1 2.0 12.4 38.8 13.1 15.4 4.6 -5.2 -0.5 5.4 12.5 1.8 3. 0.1 2.7 -3.0 1.5 Singapore -7.2 -28.2 -14.7 64 4.2 20.0 10.6 13.6 24.2 21.9 South Africa 2.1 18.5 7.2 -9.1 1.3 -8.4 13.9 3.9 11.0 12.7 -6.0 -16.9 06 -4.3 16 17.3 3.7 12.5 7.8 -13.6 7.6 Switzerland 5.9 -15.0 6.2 10.7 3.3 3.4 3.1 0.1 .0.9 22.5 33.0 8.3 96.0 23.0 .0.4 .5.0 -5.7 6.3 -8.8 49.3 Turkey 54.8 77.6 86.6 71.7 60.6 -7.9 6.7 -4.2 10.8 United Kingdom 1.5 -5.6 7.7 4.8 1.6 4.9 6. -1.5 -12.3 -8.2 1.9 United States 5.6 60.4 38.4 17.7 10.5 2.7 0.0 Venezuela 136.1 17.1 12.0 10.6 12.3 6. 19.0 Percent appreciation (+) or depreciation (-) of the U.S. dollar against a group of currencies