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.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$)]E[St+1It].
Theexchangerateisthusdeterminedbytherelativeinterestrates,andtheexpectedfuturespotrate,conditionalonalltheavailableinformation,It,asofthepresenttime.Onethuscansaythatexpectationisself-fulfilling.Sincetheinformationsetwillbecontinuouslyupdatedasnewshitthemarket,theexchangeratewillexhibitahighlydynamic,randombehavior.
3.Explaintheconditionsunderwhichtheforwardexchangeratewillbeanunbiasedpredictorofthefuturespotexchangerate.
Answer:
Theforwardexchangeratewillbeanunbiasedpredictorofthefuturespotrateif(I)theriskpremiumisinsignificantand(ii)foreignexchangemarketsareinformationallyefficient.
4.Explainthepurchasingpowerparity,boththeabsoluteandrelativeversions.Whatcausesthedeviationsfromthepurchasingpowerparity?
Answer:
Theabsoluteversionofpurchasingpowerparity(PPP):
S=P$/P£.
Therelativeversionis:
e=$-£.
PPPcanbeviolatediftherearebarrierstointernationaltradeorifpeopleindifferentcountrieshavedifferentconsumptiontaste.PPPisthelawofonepriceappliedtoastandardconsumptionbasket.
8.Explaintherandomwalkmodelforexchangerateforecasting.Canitbeconsistentwiththetechnicalanalysis?
Answer:
Therandomwalkmodelpredictsthatthecurrentexchangeratewillbethebestpredictorofthefutureexchangerate.Animplicationofthemodelisthatpasthistoryoftheexchangerateisofnovalueinpredictingfutureexchangerate.Themodelthusisinconsistentwiththetechnicalanalysiswhichtriestoutilizepasthistoryinpredictingthefutureexchangerate.
*9.Deriveandexplainthemonetaryapproachtoexchangeratedetermination.
Answer:
ThemonetaryapproachisassociatedwiththeChicagoSchoolofEconomics.Itisbasedontwotenets:
purchasingpowerparityandthequantitytheoryofmoney.Combingthesetwotheoriesallowsforstating,say,the$/£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.a
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