托马斯国际金融课后习题答案解析.doc

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Suggested answers to questions and problems
(in the textbook)

Chapter 2
2. Disagree, at least as a general statement. One meaning of a current account surplus is that the country is exporting more goods and services than it is importing. One might easily judge that this is not good—the country is producing goods and services that are exported, but the country is not at the same time getting the imports of goods and services that would allow it do more consumption and domestic investment. In this way a current account deficit might be considered good—the extra imports allow the country to consume and invest domestically more than the value of its current production. Another meaning of a current account surplus is that the country is engaging in foreign financial investment—it is building up its claims on foreigners, and this adds to national wealth. This sounds good, but as noted above it comes at the cost of foregoing current domestic purchases of goods and services. A current account deficit is the country running down its claims on foreigners or increasing its indebtedness to foreigners. This sounds bad, but it comes with the benefit of higher levels of current domestic expenditure. Different countries at different times may weigh the balance of these costs and benefits differently, so that we cannot simply say that a current account surplus is better than a current account deficit.

4. Disagree. If the country has a surplus (a positive value) for its official settlements balance, then the value for its official reserves balance must be a negative value of the same amount (so that the two add to zero). A negative value for this asset item means that funds are flowing out in order for the country to acquire more of these kinds of assets. Thus, the country is increasing its holdings of official reserve assets.

6. Item e is a transaction in which foreign official holdings of U.S. assets increase. This is a positive (credit) item for official reserve assets and a negative (debit) item for private capital flows as the U.S. bank acquires pound bank deposits. The debit item contributes to a U.S. deficit in the official settlements balance (while the credit item is recorded "below the line," permitting the official settlements balance to be in deficit). All other transactions involve debit and credit items both of which are included in the official settlements balance, so that they do not directly contribute to a deficit (or surplus) in the official settlements balance.

8. a. Merchandise trade balance: $330 - 198 = $132
Goods and services balance: $330 - 198 + 196 - 204 = $124
Current account balance: $330 - 198 + 196 - 204 + 3 - 8 = $119
Official settlements balance: $330 - 198 + 196 - 204 + 3 - 8 + 102 - 202 + 4 = $23

b. Change in official reserve assets (net) = - official settlements balance = -$23.
The country is increasing its net holdings of official reserve assets.

10. a. International investment position (billions): $30 + 20 + 15 - 40 - 25 = $0.
The country is neither an international creditor nor a debtor. Its holding of international assets equals its liabilities to foreigners.

b. A current account surplus permits the country to add to its net claims on foreigners. For this reason the country's international investment position will become a positive value. The flow increase in net foreign assets results in the stock of net foreign assets becoming positive.

Chapter 3
2. Exports of merchandise and services result in supply of foreign currency in the foreign exchange market. Domestic sellers often want to be paid using domestic currency, while the foreign buyers want to pay in their currency. In the process of paying for these exports, foreign currency is exchanged for domestic currency, creating supply of foreign currency. International capital inflows result in a supply of foreign currency in the foreign exchange market. In making investments in domestic financial assets, foreign investors often start with foreign currency and must exchange it for domestic currency before they can buy the domestic assets. The exchange creates a supply of foreign currency. Sales of foreign financial assets that the country's residents had previously acquired, and borrowing from foreigners by this country's residents are other forms of capital inflow that can create supply of foreign currency.

4. The U.S. firm obtains a quotation from its bank on the spot exchange rate for buying yen with dollars. If the rate is acceptable, the firm instructs its bank that it wants to use dollars from its dollar checking account to buy 1 million yen at this spot exchange rate. It also instructs its bank to send the yen to the bank account of the Japanese firm. To carry out this instruction, the U.S. bank instructs its correspondent bank in Japan to take 1 million yen from its account at the correspondent bank and transfer the yen to the bank account of the Japanese firm. (The U.S. bank could also use yen at its own branch if it has a branch in Japan.)

6. The trader would seek out the best quoted spot rate for buying euros with dollars, either through direct contact with traders at other banks or by using the services of a foreign exchange broker. The trader would use the best rate to buy euro spot. Sometime in the next hour or so (or, typically at least by the end of the day), the trader will enter the interbank market again, to obtain the best quoted spot rate for selling euros for dollars. The trader will use the best spot rate to sell her previously acquired euros. If the spot value of the euro has risen during this short time, the trader makes a profit.

8. a. The cross rate between the yen and the krone is too high (the yen value of the krone is too high) relative to the dollar-foreign currency exchange rates. Thus, in a profitable triangular arbitrage, you want to sell kroner at the high cross rate. The arbitrage will be: Use dollars to buy kroner at $0.20/krone, use these kroner to buy yen at 25 yen/krone, and use the yen to buy dollars at $0.01/yen. For each dollar that you sell initially, you can obtain 5 kroner, these 5 kroner can obtain 125 yen, and the 125 yen can obtain $1.25. The arbitrage profit for each dollar is therefore 25 cents.

b. Selling kroner to buy yen puts downward pressure on the cross rate (the yen price of krone). The value of the cross rate must fall to 20 (=0.20/0.01) yen/krone to eliminate the opportunity for triangular arbitrage, assuming that the dollar exchange rates are unchanged.

10. a. The increase in supply of Swiss francs puts downward pressure on the exchange-rate value ($/SFr) of the franc. The monetary authorities must intervene to defend the fixed exchange rate by buying SFr and selling dollars.

b. The increase in supply of francs puts downward pressure on the exchange-rate value ($/SFr) of the franc. The monetary authorities must intervene to defend the fixed exchange rate by buying SFr and selling dollars.

c. The increase in supply of francs puts downward pressure on the exchange-rate value ($/SFr) of the franc. The monetary authorities must intervene to defend the fixed exchange rate by buying SFr and selling dollars.

d. The decrease in demand for francs puts downward pressure on the exchange-rate value ($/SFr) of the franc. The monetary authorities must intervene to defend the fixed exchange rate by buying SFr and selling dollars.

Chapter 4
2. You will need data on four market rates: The current interest rate (or yield) on bonds issued by the U.S. government that mature in one year, the current interest rate (or yield) on bonds issued by the British government that mature in one year, the current spot exchange rate between the dollar and pound, and the current one-year forward exchange rate between the dollar and pound. Do these rates result in a covered interest differential that is very close to zero?

4. a. The U.S. firm has an asset position in yen—it has a long position in yen. To hedge its exposure to exchange rate risk, the firm should enter into a forward exchange contract now in which the firm commits to sell yen and receive dollars at the current forward rate. The contract amounts are to sell 1 million yen and receive $9,000, both in 60 days.

b. The student has an asset position in yen—a long position in yen. To hedge the exposure to exchange rate risk, the student should enter into a forward exchange contract now in which the student commits to sell yen and receive dollars at the current forward rate. The contract amounts are to sell 10 million yen and receive $90,000, both in 60 days.

c. The U.S. firm has an liability position in yen—a short position in yen. To hedge its exposure to exchange rate risk, the firm should enter into a forward exchange contract now in which the firm commits to sell dollars and receive yen at the current forward rate. The contract amounts are to sell $900,000 and receive 100 million yen, both in 60 days.

6. Relative to your expected spot value of the euro in 90 days ($1.22/euro), the current forward rate of the euro ($1.18/euro) is low—the forward value of the euro is relatively low. Using the principle of "buy low, sell high," you can speculate by entering into a forward contract now to buy euros at $1.18/euro. If you are correct in your expectation, then in 90 days you will be able to immediately resell those euros for $1.22/euro, pocketing a profit of $0.04 for each euro that you bought forward. If many people speculate in this way, then massive purchases now of euros forward (increasing the demand for euros forward) will tend to drive up the forward value of the euro, toward a current forward rate of $1.22/euro.

8. a. The Swiss franc is at a forward premium. Its current forward value ($0.505/SFr) is greater than its current spot value ($0.500/SFr).

b. The covered interest differential "in favor of Switzerland" is ((1 + 0.005)×(0.505) / 0.500) - (1 + 0.01) = 0.005. (Note that the interest rate used must match the time period of the investment.) There is a covered interest differential of 0.5% for 30 days (6 percent at an annual rate). The U.S. investor can make a higher return, covered against exchange rate risk, by investing in SFr-denominated bonds, so presumably the investor should make this covered investment. Although the interest rate on SFr-denominated bonds is lower than the interest rate on dollar-denominated bonds, the forward premium on the franc is larger than this difference, so that the covered investment is a good idea.

c. The lack of demand for dollar-denominated bonds (or the supply of these bonds as investors sell them in order to shift into SFr-denominated bonds) puts downward pressure on the prices of U.S. bonds—upward pressure on U.S. interest rates. The extra demand for the franc in the spot exchange market (as investors buy SFr in order to buy SFr-denominated bonds) puts upward pressure on the spot exchange rate. The extra demand for SFr-denominated bonds puts upward pressure on the prices of Swiss bonds—downward pressure on Swiss interest rates. The extra supply of francs in the forward market (as U.S. investors cover their SFr investments back into dollars) puts downward pressure on the forward exchange rate. If the only rate that changes is the forward exchange rate, this rate must fall to about $0.5025/SFr. With this forward rate and the other initial rates, the covered interest differential is close to zero.

10. In testing covered interest parity, all of the interest rates and exchange rates that are needed to calculate the covered interest differential are rates that can observed in the bond and foreign exchange markets. Determining whether the covered interest differential is about zero (covered interest parity) is then straightforward (although some more subtle issues regarding timing of transactions may also need to be addressed). In order to test uncovered interest parity, we need to know not only three rates—two interest rates and the current spot exchange rate—that can be observed in the market, but also one rate—the expected future spot exchange rate—that is not observed in any market. The tester then needs a way to find out about investors' expectations. One way is to ask them, using a survey, but they may not say exactly what they really think. Another way is to examine the actual uncovered interest differential after we know what the future spot exchange rate actually turns out to be, and see whether the statistical characteristics of the actual uncovered differential are consistent with an expected uncovered differential of about zero (uncovered interest parity).

Chapter 5
2. a. The euro is expected to appreciate at an annual rate of approximately ((1.005 - 1.000)/1.000)×(360/180)×100 = 1%. The expected uncovered interest differential is approximately 3% + 1% - 4% = 0, so uncovered interest parity holds (approximately).

b. If the interest rate on 180-day dollar-denominated bonds declines to 3%, then the spot exchange rate is likely to increase—the euro will appreciate, the dollar depreciate. At the initial current spot exchange rate, the initial expected future spot exchange rate, and the initial euro interest rate, the expected uncovered interest differential shifts in favor of investing in euro-denominated bonds (the expected uncovered differential is now positive, 3% + 1% - 3% = 1%, favoring uncovered investment in euro-denominated bonds. The increased demand for euros in the spot exchange market tends to appreciate the euro. If the euro interest rate and the expected future spot exchange rate remain unchanged, then the current spot rate must change immediately to be $1.005/euro, to reestablish uncovered interest parity. When the current spot rate jumps to this value, the euro's exchange rate value is not expected to change in value subsequently during the next 180 days. The dollar has depreciated immediately, and the uncovered differential then again is zero (3% + 0% - 3% = 0).

4. a. For uncovered interest parity to hold, investors must expect that the rate of change in the spot exchange-rate value of the yen equals the interest rate differential, which is zero. Investors must expect that the future spot value is the same as the current spot value, $0.01/yen.

b. If investors expect that the exchange rate will be $0.0095/yen, then they expect the yen to depreciate from its initial spot value during the next 90 days. Given the other rates, investors tend to shift their investments toward dollar-denominated investments. The extra supply of yen (and demand for dollars) in the spot exchange market results in a decrease in the current spot value of the yen (the dollar appreciates). The shift to expecting that the yen will depreciate (the dollar appreciate) sometime duri