Instructions: · Please answer each question. I do grade with liberal partial credit so please attempt each and every question as a blank questions will necessarily be given a ‘0’ grade · This exam is

Instructions:

• Please answer each question. I do grade with liberal partial credit so please attempt each and every question as a blank questions will necessarily be given a ‘0’ grade

• This exam is given on the honor system and you may use the following:

• Financial calculator

• 2 sheets of paper, to be used as a study/memory aid with anything written on then that you wish, both sides

• You will have 3 hours to complete the exam from the moment you open the exam file, please do not read it ahead of time

• Complete the exam in a word file

• For problems involving calculation: Show all work – I do not give credit for answers only I want to see that you understand the finance involved in arriving at a solution

• Once you are done please submit to the midterm exam tab in our course site

• Each question is of equal weight.

Good luck!!

1. BestBuy established a retail outlet in Ho Chi Ming City, Vietnam, which has a population of some 3 million. This outlet are massive and contain imports in addition to products purchased locally. As BestBuy generates earnings beyond what it needs in Vietnam it may remit those earnings back to the United States. BestBuy is likely to build additional outlets in Southeast Asia or in other cities in the future.

a. Explain how the W BestBuy outlets in Vietnam would use the spot market in foreign exchange.

b. Explain how BestBuy might utilize the international money market when it is establishing other stores in Asia.

c. Explain how BestBuy could use the international bond market to finance the establishment of new outlets in other foreign markets.

1. Assume that there are substantial capital flows among Mexico, the U.S., and the UK. If interest rates in Mexico decline to a level below the U.S. interest rate, and inflationary expectations remain unchanged, how could this affect the value of the Peso against the U.S. dollar?  How might this decline in Mexico’s interest rates possibly affect the value of the Peso against the pound sterling?

2. Assume that several European countries that use the euro as their currency experience higher inflation than the United States, while two other European countries that use the euro as their currency experience lower inflation than the United States. According to PPP, how will the euro’s value against the dollar be affected?

1. The Taiwanese (NTD) dollar’s value is tied to the U.S. dollar.  Explain how the following trade patterns would be affected by the appreciation of the NTD against the dollar:  (a) Tawainese exports to Japan and (b) exports to the United States. 

1. Assume that a July futures contract on Mexican pesos was avail­able in January for $.09 per unit.  Also assume that forward contracts were available for the same settlement date at a price of $.092 per peso.  How could speculators capitalize on this situation, assuming zero transaction costs?  How would such speculative activity affect the difference between the forward contract price and the futures price?

1. Investors based in the U.S. can earn 11% interest on a one-year bank deposit in Argentina (with no default risk) or 2% on a one-year U.S. bank deposit in the U.S. (with no default risk). Assess the following statement: "According to the international Fisher effect (IFE), if U.S. investors invest 1000 Argentine pesos in an Argentine bank deposit, they are expected to receive only 20 pesos (2% x 1,000 pesos) as interest. " Is this statement a correct explanation of why the international Fisher effect would discourage U.S. investors from investing in Argentina? If not, provide a more accurate explanation for why investors who believe in IFE would not pursue the Argentine investment in this example.

1. The nominal (quoted) U.S. one-year interest rate is 6%, while the nominal one-year interest rate in Canada is 5%. Assume you believe in purchasing power parity. You believe the real one-year interest rate is 2% in the U.S, and that the real one-year interest rate is 3% in Canada. Today the Canadian dollar spot rate at $.90. What do you think the spot rate of the Canadian dollar will be in one year?

1. Assume that interest rate parity exists. You expect that the one-year nominal interest rate in the U.S. is 7%, while the one-year nominal interest rate in Australia is 11%. The spot rate of the Australian dollar is $.60. You will need 10 million Australian dollars in one year. Today, you purchase a one-year forward contract in Australian dollars. How many U.S. dollars will you need in one year to fulfill your forward contract?

2. In considering the depreciation of the Asian currencies during the Asian crisis of 1997 (and the depreciations were severe and came very rapidly) due to trade flows or capital flows? Why do think the degree of movement over a short period may depend on whether the reason is trade flows or capital flows?

1. Consider that in the UK inflation and interest rates are expected to decline due to Brexit while in the US it both will rise due to full employment and Fed policy. Explain how the international trade flows should initially adjust in response to the changes in inflation (holding exchange rates constant). Explain how the international capital flows should adjust in response to the changes in interest rates (holding exchange rates constant).