国际财务管理课后习题答案第六章.docx

国际财务管理课后习题答案第六章.docx

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国际财务管理课后习题答案第六章

CHAPTER6INTERNATIONALPARITYRELATIONSHIPS

SUGGESTEDANSWERSANDSOLUTIONSTOEND-OF-CHAPTER

QUESTIONSANDPROBLEMS

QUESTIONS

1.Giveafulldefinitionofarbitrage.

Answer:

Arbitragecanbedefinedastheactofsimultaneouslybuyingandsellingthesameorequivalentassetsorcommoditiesforthepurposeofmakingcertain,guaranteedprofits.

2.Discusstheimplicationsoftheinterestrateparityfortheexchangeratedetermination.

Answer:

Assumingthattheforwardexchangerateisroughlyanunbiasedpredictorofthefuturespotrate,IRPcanbewrittenas:

S=[（1+I£）/（1+I$）]E[St+1|It].

Theexchangerateisthusdeterminedbytherelativeinterestrates,andtheexpectedfuturespotrate,conditionalonalltheavailableinformation,It,asofthepresenttime.Onethuscansaythatexpectationisself-fulfilling.Sincetheinformationsetwillbecontinuouslyupdatedasnewshitthemarket,theexchangeratewillexhibitahighlydynamic,randombehavior.

3.Explaintheconditionsunderwhichtheforwardexchangeratewillbeanunbiasedpredictorofthefuturespotexchangerate.

Answer:

Theforwardexchangeratewillbeanunbiasedpredictorofthefuturespotrateif（I）theriskpremiumisinsignificantand（ii）foreignexchangemarketsareinformationallyefficient.

4.Explainthepurchasingpowerparity,boththeabsoluteandrelativeversions.Whatcausesthedeviationsfromthepurchasingpowerparity?

Answer:

Theabsoluteversionofpurchasingpowerparity（PPP）:

S=P$/P£.

Therelativeversionis:

e=π$-π£.

PPPcanbeviolatediftherearebarrierstointernationaltradeorifpeopleindifferentcountrieshavedifferentconsumptiontaste.PPPisthelawofonepriceappliedtoastandardconsumptionbasket.

8.Explaintherandomwalkmodelforexchangerateforecasting.Canitbeconsistentwiththetechnicalanalysis?

Answer:

Therandomwalkmodelpredictsthatthecurrentexchangeratewillbethebestpredictorofthefutureexchangerate.Animplicationofthemodelisthatpasthistoryoftheexchangerateisofnovalueinpredictingfutureexchangerate.Themodelthusisinconsistentwiththetechnicalanalysiswhichtriestoutilizepasthistoryinpredictingthefutureexchangerate.

*9.Deriveandexplainthemonetaryapproachtoexchangeratedetermination.

Answer:

ThemonetaryapproachisassociatedwiththeChicagoSchoolofEconomics.Itisbasedontwotenets:

purchasingpowerparityandthequantitytheoryofmoney.Combingthesetwotheoriesallowsforstating,say,the$/£spotexchangerateas:

S（$/£）=（M$/M£）（V$/V£）（y£/y$）,

whereMdenotesthemoneysupply,Vthevelocityofmoney,andythenationalaggregateoutput.Thetheoryholdsthatwhatmattersinexchangeratedeterminationare:

1.Therelativemoneysupply,

2.Therelativevelocitiesofmonies,and

3.Therelativenationaloutputs.

10.CFAquestion:

1997,Level3.

A.Explainthefollowingthreeconceptsofpurchasingpowerparity（PPP）:

a.Thelawofoneprice.

b.AbsolutePPP.

c.RelativePPP.

B.EvaluatetheusefulnessofrelativePPPinpredictingmovementsinforeignexchangerateson:

a.Short-termbasis（forexample,threemonths）

b.Long-termbasis（forexample,sixyears）

Answer:

A.a.Thelawofoneprice（LOP）referstotheinternationalarbitrageconditionforthestandardconsumptionbasket.LOPrequiresthattheconsumptionbasketshouldbesellingforthesamepriceinagivencurrencyacrosscountries.

A.b.AbsolutePPPholdsthatthepricelevelinacountryisequaltothepricelevelinanothercountry

timestheexchangeratebetweenthetwocountries.

A.c.RelativePPPholdsthattherateofexchangeratechangebetweenapairofcountriesisaboutequal

tothedifferenceininflationratesofthetwocountries.

B.a.PPPisnotusefulforpredictingexchangeratesontheshort-termbasismainlybecause

internationalcommodityarbitrageisatime-consumingprocess.

B.b.PPPisusefulforpredictingexchangeratesonthelong-termbasis.

PROBLEMS

1.SupposethatthetreasurerofIBMhasanextracashreserveof$100,000,000toinvestforsixmonths.Thesix-monthinterestrateis8percentperannumintheUnitedStatesand6percentperannuminGermany.Currently,thespotexchangerateis€1.01perdollarandthesix-monthforwardexchangerateis€0.99perdollar.ThetreasurerofIBMdoesnotwishtobearanyexchangerisk.Whereshouldhe/sheinvesttomaximizethereturn?

Themarketconditionsaresummarizedasfollows:

I$=4%;i€=3.5%;S=€1.01/$;F=€0.99/$.

If$100,000,000isinvestedintheU.S.,thematurityvalueinsixmonthswillbe

$104,000,000=$100,000,000（1+.04）.

Alternatively,$100,000,000canbeconvertedintoeurosandinvestedattheGermaninterestrate,withtheeuromaturityvaluesoldforward.Inthiscasethedollarmaturityvaluewillbe

$105,590,909=（$100,000,000x1.01）（1+.035）（1/0.99）

Clearly,itisbettertoinvest$100,000,000inGermanywithexchangeriskhedging.

2.WhileyouwerevisitingLondon,youpurchasedaJaguarfor£35,000,payableinthreemonths.YouhaveenoughcashatyourbankinNewYorkCity,whichpays0.35%interestpermonth,compoundingmonthly,topayforthecar.Currently,thespotexchangerateis$1.45/£andthethree-monthforwardexchangerateis$1.40/£.InLondon,themoneymarketinterestrateis2.0%forathree-monthinvestment.TherearetwoalternativewaysofpayingforyourJaguar.

（a）KeepthefundsatyourbankintheU.S.andbuy£35,000forward.

（b）BuyacertainpoundamountspottodayandinvesttheamountintheU.K.forthreemonthssothatthematurityvaluebecomesequalto£35,000.

Evaluateeachpaymentmethod.Whichmethodwouldyouprefer?

Why?

Solution:

Theproblemsituationissummarizedasfollows:

A/P=£35,000payableinthreemonths

iNY=0.35%/month,compoundingmonthly

iLD=2.0%forthreemonths

S=$1.45/£;F=$1.40/£.

Optiona:

Whenyoubuy£35,000forward,youwillneed$49,000inthreemonthstofulfilltheforwardcontract.Thepresentvalueof$49,000iscomputedasfollows:

$49,000/（1.0035）3=$48,489.

Thus,thecostofJaguarasoftodayis$48,489.

Optionb:

Thepresentvalueof£35,000is£34,314=£35,000/（1.02）.Tobuy£34,314today,itwillcost$49,755=34,314x1.45.ThusthecostofJaguarasoftodayis$49,755.

Youshoulddefinitelychoosetouse“optiona”,andsave$1,266,whichisthedifferencebetween$49,755and$48489.

3.Currently,thespotexchangerateis$1.50/£andthethree-monthforwardexchangerateis$1.52/£.Thethree-monthinterestrateis8.0%perannumintheU.S.and5.8%perannumintheU.K.Assumethatyoucanborrowasmuchas$1,500,000or£1,000,000.

a.Determinewhethertheinterestrateparityiscurrentlyholding.

b.IftheIRPisnotholding,howwouldyoucarryoutcoveredinterestarbitrage?

Showallthestepsanddeterminethearbitrageprofit.

c.ExplainhowtheIRPwillberestoredasaresultofcoveredarbitrageactivities.

Solution:

Let’ssummarizethegivendatafirst:

S=$1.5/£;F=$1.52/£;I$=2.0%;I£=1.45%

Credit=$1,500,000or£1,000,000.

a.（1+I$）=1.02

（1+I£）（F/S）=（1.0145）（1.52/1.50）=1.0280

Thus,IRPisnotholdingexactly.

b.

（1）Borrow$1,500,000;repaymentwillbe$1,530,000.

（2）Buy£1,000,000spotusing$1,500,000.

（3）Invest£1,000,000atthepoundinterestrateof1.45%;

maturityvaluewillbe£1,014,500.

（4）Sell£1,014,500forwardfor$1,542,040

Arbitrageprofitwillbe$12,040

c.Followingthearbitragetransactionsdescribedabove,

Thedollarinterestratewillrise;

Thepoundinterestratewillfall;

Thespotexchangeratewillrise;

Theforwardexchangeratewillfall.

TheseadjustmentswillcontinueuntilIRPholds.

4.Supposethatthecurrentspotexchangerateis€0.80/$andthethree-monthforwardexchangerateis€0.7813/$.Thethree-monthinterestrateis5.6percentperannumintheUnitedStatesand5.40percentperannuminFrance.Assumethatyoucanborrowupto$1,000,000or€800,000.

a.Showhowtorealizeacertainprofitviacoveredinterestarbitrage,assumingthatyouwanttorealizeprofitintermsofU.S.dollars.Alsodeterminethesizeofyourarbitrageprofit.

b.Assumethatyouwanttorealizeprofitintermsofeuros.Showthecoveredarbitrageprocessanddeterminethearbitrageprofitineuros.

Solution:

a.（1+i$）=1.014<（F/S）（1+i€）=1.053.Thus,onehastoborrowdollarsandinvestineurostomakearbitrageprofit.

1.Borrow$1,000,000andrepay$1,014,000inthreemonths.

2.Sell$1,000,000spotfor€1,060,000.

3.Invest€1,060,000attheeurointerestrateof1.35%forthreemonthsandreceive€1,074,310atmaturity.

4.Sell€1,074,310forwardfor$1,053,245.

Arbitrageprofit=$1,053,245-$1,014,000=$39,245.

b.Followthefirstthreestepsabove.Butthelaststep,involvingexchangeriskhedging,willbedifferent.

5.Buy$1,014,000forwardfor€1,034,280.

Arbitrageprofit=€1,074,310-€1,034,280=€40,030

5.IntheissueofOctober23,1999,theEconomistreportsthattheinterestrateperannumis5.93%intheUnitedStatesand70.0%inTurkey.WhydoyouthinktheinterestrateissohighinTurkey?

Basedonthereportedinterestrates,howwouldyoupredictthechangeoftheexchangeratebetweentheU.S.dollarandtheTurkishlira?

Solution:

AhighTurkishinterestratemustreflectahighexpectedinflationinTurkey.AccordingtointernationalFishereffect（IFE）,wehave

E（e）=i$-iLira

=5.93%-70.0%=-64.07%

TheTurkishlirathusisexpectedtodepreciateagainsttheU.S.dollarbyabout64%.

6.AsofNovember1,1999,theexchangeratebetweentheBrazilianrealandU.S.dollarisR$1.95/$.TheconsensusforecastfortheU.S.andBrazilinflat