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College Bowl

College Bowl. Round #1. Question #1. List , in order from highest to lowest trading volume, the six most widely traded currencies. UDS EUR JPY GBP CHF CAD. Question #2. Suppose the current CAD/USD exchange rate is CAD/USD = .70

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College Bowl

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  1. College Bowl Round #1

  2. Question #1 • List , in order from highest to lowest trading volume, the six most widely traded currencies. • UDS • EUR • JPY • GBP • CHF • CAD

  3. Question #2 • Suppose the current CAD/USD exchange rate is CAD/USD = .70 If the dollar experiences a 10% appreciation, what is the new CAD/USD exchange rate? CAD/USD = (.70)(1-.1) = .63 ($/CAD)

  4. Question #3 • Consider the following exchange rates: EUR/USD = 1.50 USD/JPY = 100 EUR/JPY = 200 What would be a profitable trading strategy and what would your trading return be? (i.e. profits as a percentage of total investment)

  5. Question #3 EUR/USD = 1.50 ($/E) USD/JPY = 100 (Y/$) EUR/JPY = 200 (Y/E) 200/100 = 2 ($/E) The Euro (In terms of $) is undervalued….sell $ and buy Euro!! 1/1.50 .67(200) 134/100 $1 E .67 Y 134 $1.34 (A 34% Return)!! Sell $ Buy Euro Sell Euro Buy Yen Sell Yen Buy $

  6. Question #4 • Suppose that IBM invests $100M to build a new manufacturing facility in China. $80M of the supplies are purchased from the US, $10M are purchased in China while the remaining $10 are purchased in France. How would this transaction be recorded in both the US and Chinese BOP accounts?

  7. Current Account Exports Goods: $80M Services: Imports Goods: Services: Net Factor Income: Net Unilateral Transfers: CA Balance: $80M Capital & Financial Account Foreign acquisition of US assets: US Treasuries: Private Securities: $20M FDI: Currency: US acquisition of foreign assets: FDI: -$100M Portfolio Investment: Official Reserve Assets Foreign acquisition of US ORA: US acquisition of foreign ORA: KFA Balance: -$80M BOP (US)

  8. Current Account Exports Goods: Services: Imports Goods: -$90M Services: Net Factor Income: Net Unilateral Transfers: CA Balance: -$90M Capital & Financial Account Acquisition of Foreign assets: US Treasuries: Private Securities: -$10M FDI: Currency: Foreign acquisition of Domestic assets: FDI: $100M Portfolio Investment: Official Reserve Assets Foreign acquisition of Domestic ORA: Acquisition of Foreign ORA: KFA Balance: $90M BOP (China)

  9. Question #5 • Suppose that US citizens invest $10M in Russian companies. • $3M is used to pay Russian workers • $2M is used to purchase supplies from Europe • $3M is used to purchase US Treasury Bills • $2M is used to buy protection from the Russian Mob (who deposit the funds in a Swiss bank account) What will the Russian BOP accounts look like?

  10. Current Account Exports Goods: Services: Imports Goods: -$2 Services: Net Factor Income: Net Unilateral Transfers: CA Balance: -$2 Capital & Financial Account Acquisition of Foreign assets: US Treasuries: -$3M Private Securities: FDI: Currency: -$3M Foreign acquisition of Domestic assets: FDI: Portfolio Investment: $10M Official Reserve Assets Foreign acquisition of Domestic ORA: Acquisition of Foreign ORA: KFA Balance: $4M Statistical Discrepancy: $2M BOP (Russia)

  11. Question #6 • Suppose that the EUR/USD exchange rate is $1.35 per Euro. If the US price level is $112 and the European price index is E105, what is the real exchange rate between the US and Europe? Real Exchange Rate eP* (1.35)(105) = = = 1.27 P 112

  12. Question #7 • Suppose that the exchange rate between the US and Mexico is $0.50 per Peso. Baseballs cost $15 in the US and P 20 in Mexico. How could you make money and what would your profits be? (zero shipping costs, tariffs, etc) PPP Implied Exchange Rate $15 = = $ .75 per Peso (The Peso is Undervalued) P 20 Buy in Mexico, Sell in the US: Profit = $15 – (P20)(.50) = $5

  13. Question #8 • Suppose that a steel costs $400/ton in the US and C$ 600/ton in Canada. There are no shipping costs, but the US imposes a 10% import tariff on imported steel. Within what range should the CAD/USD exchange rate fluctuate? PPP Implied Exchange Rate $400 = = .67 CD 600 Buy in US, Sell in Canada Buy in Canada, Sell in US Profit = eP* - P = 0 e = .67 Profit = P – eP*(1.10) = 0 e = .61 Exchange rate can fluctuate between .61 and .67

  14. Question #9 • US inflation has averaged 3.5% while in Denmark, the inflation rate has averaged 2%. Over the past year, the Krone has appreciated from 8K/$ to 6K/$. What has happened to the real exchange rate? Does this suggest a possible profit opportunity? % Change in Real Exchange Rate % Change in Nominal Exchange Rate Foreign Inflation Domestic Inflation - + = = 25% + 2% - 3.5% = 23.5% Real Dollar Depreciation You could potentially make money by buying in the US and selling in Denmark

  15. Question #10 • Suppose that we have the following inflation data in the US and Europe: • US Tradable Goods: 10% • US Non-Tradable Goods: 15% • European Tradable Goods: 5% • European Non-Tradable Goods: 5% • If price indices in both Europe and US are defined as • P = .5(Tradables) + .5(Non-Tradables) What should happen to the real and nominal exchange rates between the US and Europe?

  16. Question #10 For Simplicity, assume that all prices are initially 1. The following year we have the following.

  17. Question #10 The nominal exchange rate adjusts according to the law of one price (for tradables). A 5% Nominal Depreciation The real exchange rate adjusts according to the following. A 2% Real Appreciation

  18. Lightning Round Name the Following Country’s currency • Israel • Australia • Philippines • Austria • Iran • India • South Africa • Sweden • Thailand • South Korea Shekel Dollar Peso Euro Shilling Rial Rupee Rand Krona Baht Won

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