# Problem Set 2 Essay

5051 Words Sep 19th, 2013 21 Pages
Problem Set 2

International Finance

Shrikhande
Fall 2006

SUGGESTED SOLUTIONS TO CHAPTER 4 PROBLEMS

1. From base price levels of 100 in 1987, West German and U.S. price levels in 1988 stood at 102 and 106, respectively. If the 1987 \$/DM exchange rate was \$0.54, what should the exchange rate be in 1988? In fact, the exchange rate in 1988 was DM 1 = \$0.56. What might account for the discrepancy? (Price levels were measured using the consumer price index.)

Answer. If e1981 is the dollar value of the German mark in 1988, then according to purchasing power parity e1988/.54 = 106/102 or e1988 = \$.5612. The discrepancy between the predicted rate of \$.5612 and the actual rate of \$.56 is insignificant and hence needs no explaining.
dollars.

a. If the current exchange rate is \$1.63:,1, what is the expected future exchange rate in one year?

Answer. According to the international Fisher effect, the spot exchange rate expected in one year equals 1.63 x 1.09/1.12 = \$1.5863.

b.Suppose a change in expectations regarding future U.S. inflation causes the expected future spot rate to decline to \$1.52:£1. What should happen to the U.S. interest rate?

Answer. If rus is the unknown U.S. interest rate, and assuming that the British interest rate stayed at 12% (because there has been no change in expectations of British inflation), then according to the IFE, 1.52/1.63 = (1+rus)/1.12 or rus = 4.44%.

5. If expected inflation is 100% and the real required return is 5%, what will the nominal interest rate be according to the Fisher effect?

Answer. According to the Fisher effect, the relationship between the nominal interest rate, r, the real interest rate a, and the expected inflation rate, i, is 1 + r = (1 + a)(1 + i). Substituting in the numbers in the problem yields 1 + r = 1.05 x 2 = 2.1, or r = 110%.

6. Suppose that in Japan the interest rate is 8% and inflation is expected to be 3%. Meanwhile, the expected inflation rate in France is 12%, and the English interest rate is 14%. To the nearest whole number, what is the best estimate of the one-year forward exchange premium (discount) at which the pound will be

## Related Documents

• ###### Acc 300 Wk 5 Team Assignment Global Environments Problem Sets Pe-2 E7-5 E7-6 E7-9

Team A Week 5 Problems PE-2, page 862 In January 2012, the administration of Sarah Company determined that it has enough money to buy transient investments in debt and stock securities. In the course of the year, these are the transactions that happened. Feb. 1 Purchased 1,200 shares of NJF common stock for \$50,600 plus brokerage fees of \$1,000. Mar. 1 Purchased 500 shares of SEK common stock for \$18,000 plus brokerage fees of \$500. Apr. 1 Purchased 70 \$1,000, 8% CRT bonds…

Words: 1204 - Pages: 5
• ###### Essay Bus 308 Statistics for Managers Complete Week 1 to 5

com/bus-308-statistics-for-managers-complete-week-1-to-5 Product Description BUS 308 Statistics for Managers, New Syllabus WEEK 1 Assignment Problem Set 1. Using the Excel Analysis ToolPak function descriptive statistics, generate descriptive statistics for the salary data. Which variables does this function not work properly for, even though we have some excel generated results? 2. Sort the data by Gen or Gen 1 (into males and females) and find the mean and standard deviation for each gender for the following…

Words: 3521 - Pages: 15
• ###### Hcp 220 Week 4 Assignment- Measurements Using Metric, Apothecary, and Household Systems

calculations in a Microsoft® Word document Completethe following conversions: 1. Test Your Knowledge (metric system), p. 41: Problems 2, 4, 6, 8, 12 &14 2. Test Your Knowledge (apothecary system), p. 42: Problems 21, 29, 34, 37 & 40 3. Test Your Knowledge (household system), p. 42: Problems 42, 44, 49, 52, 54 & 56 Postyour work and answers to all three sets of problems along with a signed copy of the Certificate of Originality as an attachment under the Assignment link. HCP 220 Week 4…

Words: 3040 - Pages: 13
• ###### Acc 300 Complete Course Material Essay

300 Week 1 Accounting Equation Paper ACC 300 Week 1 Discussion Questions DQs ACC 300 Week 1 Individual Assignment Chapter 2 Brief Exercises ACC 300 Week 2 Discussion Questions DQs Ver 2 ACC 300 Week 2 Discussion Questions DQs ACC 300 Week 2 Learning Team Assignment ACC 300 Week 2 Problem Set 1 ACC 300 Week 2 Team Reflection ACC 300 Week 3 Discussion Question DQs Ver 2 ACC 300 Week 3 Discussion Questions DQs ACC 300 Week 3 Individual Assignment Part I ACC 300 Week 3 Individual Assignment…

Words: 4926 - Pages: 20
• ###### Acc 547 Entire Course | All Assignments Essay

situation ACC 547 Week 2 Individual Assignment Week Two Problem Set Complete the following problems located in Taxation of Individuals and Business Entities: • Problem 72 (Ch. 2) • Problem 49 (Ch. 3) • Comprehensive Problems 40 & 41 (Ch. 4) ACC 547 Week 3 Individual Assignment Week Three Problem Set\ Complete the following problems located in Taxation of Individuals and Business Entities: • Comprehensive Problem 67 (Ch. 5) • Comprehensive Problem 66 (Ch. 6) • Comprehensive Problem 81 (Ch. 8) ACC…

Words: 1701 - Pages: 7
• ###### Grand Canyon Mgt 655 Complete Course -Latest Essay

hwspeed.com/Grand-Canyon-MGT-655-Complete-Course-Latest-70903222.htm?categoryId=-1 If You Face Any Problem E- Mail Us At JOHNMATE1122@Gmail.Com (All Weeks 2 - 8 Assignment Problem Set + Discussion Questions Latest Module 1 DQ 1 With respect to a firm’s supply chain design, what are some key challenges in terms of achieving an optimal level of mass customization? Module 1 DQ 2 Articulate key aspects of operations management. Explain why operations management is important…

Words: 1134 - Pages: 5
• ###### Essay Evaluation Of Decision Making Places

possibilities or options. This approach is highly dependent upon participant honesty for valid results (Goldstein, 2011). According to Tversky and Kahneman (1981), when a problem is framed in different ways, predictable shifts of preference are produced by the Psychological principles which govern the perception of decision problems and the evaluation of probabilities and outcomes. In choices that have to do with monetary outcomes, both real and hypothetical, and in questions that pertain to the loss…

Words: 1352 - Pages: 6
• ###### Acc 548 Entire Course All Learning Team Assignmen Essay

http://homeworkonestop.com/index.php?route=product/category&path=9 Product Description ACC 548 Week 1 Individual Assignment Comprehensive Annual Financial Report Briefing ACC 548 Week 2 Learning Team Assignment Text Problem Sets ACC 548 Week 3 Individual Assignment Text Problem Sets ACC 548 Week 4 Individual Assignment Comprehensive Annual Financial Report Presentation ACC 548 Week 5 Learning Team Assignment Reporting Requirements Memo ACC 548 Week 6 Individual Assignment…

Words: 6748 - Pages: 27