Tom Hason International Business Assingment Help With Solution
1. (5 points) The table below gives information on foreign trade for a country.
a. Using the initial information, what is the country’s trade deficit?
b. If the government undertakes policies to depreciate the currency 18%, what will be
the immediate effect on the trade balance?
c. After the pass-through period (when the quantity has fully adjusted to the new
numbers given below and the exchange rates are still at the new rate), what will the
trade balance be?
Initial spot rate 2.30
Average export price 17.50
Average import price 12.00
Export quantity 230
Import quantity 190
New export quantity 360
New import quantity 145
2. (5 points) You observe the following three exchange rates at which you can buy or sell
(borrow or lend). Calculate your total profit from triangular arbitrage, reporting your total
profit in $ (by first calculating the profit in British pounds and then converting).
Wells Fargo ¥80.00/£
3. (5 points) You are working as a corporate treasurer and observe the following two exchange
rates. Calculate, using $1 million how you could make an arbitrage (risk-free) profit.
Citibank NYC $0.9655 – 65/€
Barclays London $0.9648 – 51/
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4. (10 points) A foreign exchange dealer has $1 million for a short-term money market
investment. That is, he wants minimal risk in his investment, but he still wants to maximize
the available return. Given the following market rates in the U.S. and London, what would
you recommend? Why? And what is the annualized rate of return for your recommended
Spot exchange rate £1.2810/$
3-month forward rate £1.2740/$
3-month U.S. interest rate 4.800% p.a.
3-month £ rate 3.200% p.a.
*Note: p.a. stands for per annum, meaning the annualized rate. Assume that 3-months
represents exactly one-fourth of the year and make the necessary conversion.
5. (5 points) As of today, the exchange rate between the Brazilian real and U.S. dollar is
R$1.45/$. The consensus forecast for the U.S. and Brazilian inflation rates for the next oneyear
period is 3.6% and 16%, respectively. What would you forecast the exchange rate to be
one year in the future?
6. (10 points) Consider a spot exchange rate of $1.40/£ and a 3-month forward exchange rate of
$1.43/£. Assume a 3-month interest rate of 7.6% p.a. in the U.S. and 4.8% p.a. in the U.K.
Assume that you can borrow as much as $1,000,000.
a. Determine whether interest rate parity is holding. (Answer yes or no and show why.)
b. If IRP does not hold, calculate your profit.
7. (10 points) Due to the integrated nature of their capital markets, investors in both the U.S.
and U.K. require the same real interest rate of 2.5% on their lending. There is consensus in
capital markets that the annual inflation rate is likely to be 1.5% in the U.S. and 2.5% in the
U.K. for the next three years. The spot exchange rate is currently $1.34/£.
a. Compute the nominal interest rate p.a. in both the U.S. and U.K., assuming that the
simplified version of the Fisher effect holds.
b. What is your expected future spot dollar-pound exchange rate three years from now
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