BUS322 TMA TMB TMD 2014 TUT06 CH09

Pbm9.1

Problem 9.1 Trepak (The Russian Dance)

The Russian ruble (RUB) traded at RUB 29.00/USD on January 2, 2009. On December 11, 2010, its value had fallen to RUB 31.45/USD. What was the percentage change in its value?

AssumptionsRateValuesSpot rate, January 2, 2009 (RUB/USD)S129.00Spot rate, December 11, 2010 (RUB/USD)S231.45

Calculation of percentage change:Percentage change in the peso versus the dollar-7.79%

Percent change = ( S1 - S2 ) ( S2 )

Pbm9.2

Problem 9.2 Center of the World

The Ecuadorian sucre (S) suffered from hyper-inflationary forces throughout 1999. Its value moved from S5,000/$ to S25,000/$. What was the percentage change in its value?

AssumptionsRateValuesInitial spot rate, 1999 (Sucre/$)S15,000Ending spot rate, 1999 (Sucre/$)S225,000

Calculation of percentage change:Percentage change in the sucre versus the dollar-80.00%

Percent change = ( S1 - S2 ) ( S2 )

Pbm9.3

Problem 9.3 Reais Reality

The Brazilian reais's (R$) value was R$1.80/$ on Thursday, January 24, 2008. Its value fell to R$2.39/$ on Monday, January 26, 2009. What was the percentage change in its value?

AssumptionsValuesSpot rate, Thursday, January 24, 2008, R$/$1.80Spot rate, Monday, January 26, 2009, R$/$2.39

Calculation percentage appreciation or depreciationPercentage change in the real versus the dollar-24.69% Because the real fell in value:Depreciation

Percent change = ( S1 - S2 ) ( S2 )

Pbm9.4

Problem 9.4 That's Loonie

The Canadian dollars value against the U.S. dollar has seen some significant changes over recent history. Using the following graph of the C$/US$ exchange rate for the 30 year period between 1980 and end-of-year 2010 to estimate the percentage change in the Canadian dollars value (its affectionately known as the "loonie") versus the dollar for the following periods.

a. January 1980 - December 1985b. January 1986 - December 1991c. January 1992 - December 2001d. January 2002 - December 2006e. January 2007 - December 2008f. January 2009 - December 2010

The following values are taken by "eye-balling" the graph. Although you may not have the exact same values, you should be close.

Change in the valueStarting ValueEnding Valueof the loonieTime Period(C$/US$)(C$/US$)(percent)Jan 1980 - Dec 19851.161.40-17.1%Jan 1986 - Dec 19911.411.1522.6%Jan 1992 - Dec 20011.181.57-24.8%Jan 2002 - Dec 20061.601.1539.1%Jan 2007 - Dec 20081.181.23-4.1%Jan 2009 - Dec 20101.231.0023.0%

Percent change = (Starting Value - Ending Value ) / (Ending Value)

Pbm9.5

Problem 9.5 Paris to Tokyo

The Japanese yen-euro cross rate is one of the more significant currency values for global trade and commerce. The graphic at right shows this cross-rate from when the euro was launched in January 1999 through the end-of-year 2010. Estimate the change in the value of the yen over the following three periods of change.

Change in theStarting ValueEnding Valuevalue of the yenTime Period(/)(/)(percent)a. Jan 1999 - Aug 200113110920.2%b. Sep 2001 - June 2008108166-34.9%c. July 2008 - Dec 201016911053.6%

Percent change = ( S1 - S2 ) ( S2 )

Source: PACIFIC Exchange Rates 2010 by Prof. Werner Antweiler, University of British Columbia, Vancouver BC, Canada.Monthly Average Exchange Rates:Japanese Yen per European Euro

Pbm9.6

Problem 9.6 Lowering the Lira

The Turkish lira (TL) was officially devalued by the Turkish government in February 2001 during a severe political and economic crisis. The Turkish government announced on February 21 that the lira would be devalued by 20%. The spot exchange rate on February 20th was TL68,000/$.

AssumptionsValuesSpot rate, February 20, 2001 (TL/$)68,000Turkish government announces a devaluation of:-20.00%Spot rate, February 24, 2001 (TL/$)100,000

a. What was the exchange rate after devaluation?

Spot rate after devaluation85,000

Check calculation: percentage change in values-20.0%

b. What was percentage change after falling to TL100,000/$?

Percentage change from initial value-32.0%

Percentage change from "devalued" value-15.0%

Pbm9.7

Problem 9.7 Cada Seis Aos

Mexico was famous or infamous for many years in having two things every six years (cada seis aos in Spanish): a presidential election and a currency devaluation. This was the case in 1976, 1982, 1988, and in 1994. In its last devaluation on December 20, 1994, the value of the Mexican peso (Ps) was officially changed from Ps3.30/$ to Ps5.50/$. What was the percentage devaluation?

AssumptionsRateValuesSpot rate, December 20, 1994 (Ps/$)S13.30Spot rate, December 21, 1994 (Ps/$)S25.50

Calculation percentage of devaluation:Percentage change in the peso versus the dollar-40.00%

Percent change = ( S1 - S2 ) ( S2 )

The peso since that time, and we have now weathered two additional six-year dates (2000 and 2006), has been remarkable stable against all major currencies, including the dollar.

Pbm9.8

Problem 9.8 Brokedown Palace

The Thai baht (Bt) was devalued by the Thai government from BT25/$ to BT29/$ on July 2, 1997. What was the percentage devaluation of the baht?

AssumptionsRateValuesOpening spot rate, July 2, 1997 (Bt/$)S125.00Closing spot rate, July 2, 1997 (Bt/$)S229.00

Calculation of percentage change:Percentage change in the baht versus the dollar-13.79%

Percent change = ( S1 - S2 ) ( S2)

Pbm9.9

Problem 9.9 Forecasting the Argentine Peso

As illustrated in the graph, the Argentine peso moved from its fixed exchange rate of Ps1.00/$ to over Ps2.00/$ in a matter of days in early January 2002. After a brief period of high volatility, the peso's value appeared to settled down into a range varying between 2.0 and 2.5 pesos per dollar. If you were forecasting the Argentine peso further into the future, how would you use the information in the graphic -- the value of the peso freely-floating in the weeks following devaluation -- to forecast its future value?

"Eye-balled"DateValuesFebruary 1st (Ps/$)2.00February 28th (Ps/$)2.20

Percent change-9.09%

If peso continued to fall at same rate for 1 month:

March 1, 2002 (Ps/$)2.20

Percent change-9.09%

March 30, 2002 (Ps/$)2.42

Source: 2002 by Prof. Werner Antweiler, University of British Columbia, Vancouver, BC, Canada. Time period shown in diagram: Jul 1, 2000 - Jan 27, 2002.

The period immediately following the peso's devaluation was highly volatile and a period of transition. Most forecasters would view the February periodas a period in which the new exchange rate is beginning to "stabilize" in its trading.

Data

Forecasting the Pan-Pacific Pyramid: Australia, Japan & The United States

Gross Domestic ProductIndustrialUnemploymentForecastForecastProductionRateCountryLatest QtrQtr*2007e2008eRecent QtrLatestAustralia4.3%3.8%4.1%3.5%4.6%4.2%Japan1.6%-1.2%2.0%1.9%4.3%3.8%United States1.9%3.8%2.0%2.2%1.9%4.7%

Consumer PricesInterest RatesForecast3-month1-yr GovtCountryYear AgoLatest2007eLatestLatestAustralia4.0%2.1%2.4%6.90%6.23%Japan0.9%-0.2%0.0%0.73%1.65%United States2.1%2.8%2.8%4.72%4.54%

Trade BalanceCurent AccountCurrent Units (per US$)Last 12 mosLast 12 mosForecast 07Country(billion $)(billion $)(% of GDP)Oct 17thYear AgoAustralia-13.0-$47.0-5.7%1.121.33Japan98.1$197.54.6%117119United States-810.7-$793.2-5.6%1.001.00

Source: Data abstracted from The Economist, October 20, 2007, print edition. Unless otherwise noted, percentages are percentage changes over one year. Rec Qtr = recent quarter. Values for 2007e are estimates or forecasts.

Pbms 9.10-9.13

Problems 9.10-9.13 Forecasting the Pan-Pacific Pyramid: Australia, Japan & The United States

Gross Domestic ProductIndustrialUnemploymentForecastForecastProductionRateCountryLatest QtrQtr*2007e2008eRecent QtrLatestAustralia4.3%3.8%4.1%3.5%4.6%4.2%Japan1.6%-1.2%2.0%1.9%4.3%3.8%United States1.9%3.8%2.0%2.2%1.9%4.7%

Consumer PricesInterest RatesForecast3-month1-yr Govt BondCountryYear AgoLatest2007eLatestLatestAustralia4.0%2.1%2.4%6.90%6.23%Japan0.9%-0.2%0.0%0.73%1.65%United States2.1%2.8%2.8%4.72%4.54%

Trade BalanceCurrent AccountCurrent Units (per US$)Last 12 mosLast 12 mosForecast 07Country(billion $)(billion $)(% of GDP)Oct 17thYear AgoAustralia-13.0-$47.0-5.7%1.121.33Japan98.1$197.54.6%117119United States-810.7-$793.2-5.6%1.001.00

Source: Data abstracted from The Economist, October 20, 2007, print edition. Unless otherwise noted, percentages are percentage changes over one year. Rec Qtr = recent quarter. Values for 2007e are estimates or forecasts.

10. Current spot rates. What are the current spot exchange rates for the following cross rates?

a. Japanese yen/US dollar exchange rate= '/$117.00 b. Japanese yen/Australian dollar exchange rate= /$ / A$/$104.4643 c. Australian dollar/US dollar exchange rate= A$/$1.1200

11. Purchasing power parity forecasts. Assuming purchasing power parity, and assuming that the forecasted change in consumer prices is a good proxy of predicted inflation, forecast the following cross rates:

a. Japanese yen/US dollar in 1 year= Spot (/$) x (1 + -inflation) / (1 + $-inflation)113.8132 b. Japanese yen/Australian dollar in 1 year= Spot (/A$) x (1 + -inflation) / (1 + A$-inflation)102.02 c. Australian dollar/US dollar in 1 year= Spot (A$/$) x (1 + A$-inflation) / (1 + $ inflation)1.1156

12. International Fisher forecasts. Asssuming International Fisher applies to the coming year, forecast the following future spot exchange rates using the government bond rates for the respective country currencies:

a. Japanese yen/US dollar in 1 year= Spot (/$) x (1 + i-) / (1 + i-$)113.77 b. Japanese yen/Australian dollar in 1 year= Spot (/A$) x (1 + i-) / (1 + i-A$)99.96 c. Australian dollar/US dollar in 1 year= Spot (A$/$) x (1 + i-A$) / (1 + i-$)1.1381

13. Implied real interest rates. If the nominal interest rate is the government bond rate, and the current change in consumer prices is used as expected inflation, calculate the implied "real" rates of interest by currency.

a. Australian dollar "real" rate= (1 + nominal) / (1 + A$ consumer price change) - 13.74% b. Japanese yen "real" rate= (1 + nominal) / (1 + consumer price change) - 11.65% c. US dollar "real" rate= (1 + nominal) / (1 + $ consumer price change) - 11.69%

Pbms 9.14-9.15

Problems 9.14-9.15 Forecasting the Pan-Pacific Pyramid: Australia, Japan & The United States

Gross Domestic ProductIndustrialUnemploymentForecastForecastProductionRateCountryLatest QtrQtr*2007e2008eRecent QtrLatestAustralia4.3%3.8%4.1%3.5%4.6%4.2%Japan1.6%-1.2%2.0%1.9%4.3%3.8%United States1.9%3.8%2.0%2.2%1.9%4.7%

Consumer PricesInterest RatesForecast3-month1-yr Govt BondCountryYear AgoLatest2007eLatestLatestAustralia4.0%2.1%2.4%6.90%6.23%Japan0.9%-0.2%0.0%0.73%1.65%United States2.1%2.8%2.8%4.72%4.54%

Trade BalanceCurrent AccountCurrent Units (per US$)Last 12 mosLast 12 mosForecast 07Country(billion $)(billion $)(% of GDP)Oct 17thYear AgoAustralia-13.0-$47.0-5.7%1.121.33Japan98.1$197.54.6%117119United States-810.7-$793.2-5.6%1.001.00

Source: Data abstracted from The Economist, October 20, 2007, print edition. Unless otherwise noted, percentages are percentage changes over one year. Rec Qtr = recent quarter. Values for 2007e are estimates or forecasts.

14. Forward rates. Using the spot rates and three-month interest rates above, calculate the 90-day forward rates for:

a. Japanese yen/US dollar exchange rate= Spot (/$) x (1 + i 3 month) / (1 + i$ 3 month)115.85 b. Japanese yen/Australian dollar exchange rate= Spot (/A$) x (1 + i 3 month) / (1 + iA$ 3 month)102.88 c. Australian dollar/US dollar exchange rate= Spot (A$/$) x (1 + A$ 3 month) / (1 + i$ 3 month)1.1260

Note: All interest rates need to be adjusted for a 90 day period of a 360 day year for the calculation.

15. Real economic activity and misery. Calculate the country's Misery Index (unemployment + inflation) and then use it like interest differentials to forecast the future spot exchange rate, one year into the future.

Australia's Misery Index6.60%Forecast spot = Spot x ( 1 + Misery-1) / ( 1 + Misery-2) Japan's Misery Index3.80% United States's Misery Index7.50%StartingForecastSpot RateSpot Rate a. Japanese yen/US dollar exchange rate in 1 year117.00112.9730 b. Japanese yen/Australian dollar exchange rate in 1 year104.46101.7204 c. Australian dollar/US dollar exchange rate in 1 year1.12001.1106