The following contain annual data on interest rates, inflation rates, and percentage change in exchange rates (based on indirect quotes) for foreign

The following  contain annual data on interest rates, inflation 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 2001-2006). 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. 

Please answer the following five questions:

Country New Zealand: 

Consumer Price Index - (1995: 3.8) (1996: 2.3) (1997: 1.2) (1998: 1.3) (1999: -0.1) (2000: 2.6) (2001:2.6) (2002: 2.7) (2003: 1.8) (2004: 2.3) (2005: 3.0) (2006: 3.4) (2007: 2.4)

Exchange rates- (1995: -9.5) (1996: -4.6) (1997: 3.8) (1998: 23.4) (1999: 1.4) (2000: 15.9) (2001: 8.7) (2002:-9.5) (2003:-20.2) (2004: -12.4) (2005:-5.7) (2006: 8.4) (2007: -11.7)

Short-Term Interest Rates - (1995: 9.0) (1996: 9.3) (1997: 7.7) (1998: 7.3) (1999: 4.8) (2000: 6.5) (2001: 5.7) (2002: 5.7) (2003: 5.4) (2004: 6.1) (2005: 7.1) 

(2006: 7.5) (2007: 8.3)

United States (CPI) (1995: 2.8)  (1996: 2.9)  (1997: 2.3) (1998: 1.5) (1999 2.2) (2000: 3.4) (2001: 2.8) (2002: 1.6) (2003: 2.3 ) (2004: 2.7) (2005: 3.4) (2006: 3.2) (2007: 2.9)

United States (EXCHANGE RATES) (1995: -5.6) (1996:  4.5) (1997:  7.7) (1998:  4.8) (1999:  -1.6)  (2000:4.9) (2001: 6.0) (2002: -1.5) (2003: -12.3) (2004: -8.2) (2005: -1.9) (2006: -1.5) (2007: -5.6)

United States(Short-term Interest rates) (1995: 5.9) (1996: 5.4)  (1997:5.6) (1998: 5.5)  (1999: 5.3)  (2000: 6.5) (2001: 3.7) (2002: 1.7) (2003: 1.2) (2004: 1.6) (2005: 3.5) (2006: 5.2) (2007: 5.3)

 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