College BowlCollege Bowl

Round #1Round #1

Question #1Question #1

List , in order from highest to lowest List , in order from highest to lowest trading volume, the six most widely trading volume, the six most widely traded currencies.traded currencies.

1.1. UDSUDS

2.2. EUREUR

3.3. JPYJPY

4.4. GBPGBP

5.5. CHFCHF

6.6. CADCAD

Question #2Question #2

Suppose the current CAD/USD Suppose the current CAD/USD exchange rate isexchange rate is

CAD/USD = .70CAD/USD = .70

If the dollar experiences a 10% If the dollar experiences a 10% appreciationappreciation, what is the new , what is the new CAD/USD exchange rate?CAD/USD exchange rate?

CAD/USD = (.70)(1-.1) = CAD/USD = (.70)(1-.1) = .63 ($/CAD).63 ($/CAD)

Question #3Question #3 Consider the following exchange rates:Consider the following exchange rates:

EUR/USD = 1.50EUR/USD = 1.50USD/JPY = 100USD/JPY = 100EUR/JPY = 200EUR/JPY = 200

What would be a profitable trading strategy What would be a profitable trading strategy and what would your trading return be? and what would your trading return be? (i.e. profits as a percentage of total (i.e. profits as a percentage of total investment)investment)

Question #3Question #3

EUR/USD = 1.50 ($/E)EUR/USD = 1.50 ($/E)

USD/JPY = 100 (Y/$)USD/JPY = 100 (Y/$)

EUR/JPY = 200 (Y/E)EUR/JPY = 200 (Y/E) 200/100 = 2 ($/E)200/100 = 2 ($/E)

The Euro (In terms of $) is undervalued….sell $ and buy Euro!!

$11/1.50

E .67.67(200)

Y 134134/100

$1.34 (A 34% Return)!!

Sell $ Buy Euro

Sell Euro Buy Yen

Sell Yen Buy $

Question #4Question #4

Suppose that IBM invests $100M to build a Suppose that IBM invests $100M to build a new manufacturing facility in China. new manufacturing facility in China. $80M of the supplies are purchased from $80M of the supplies are purchased from the US, $10M are purchased in China the US, $10M are purchased in China while the remaining $10 are purchased in while the remaining $10 are purchased in France.France.

How would this transaction be recorded in How would this transaction be recorded in both the US and Chinese BOP accounts?both the US and Chinese BOP accounts?

BOP (US)BOP (US)Current AccountCurrent AccountExports Exports

Goods: Goods: $80M$80MServices:Services:

ImportsImportsGoods:Goods:Services:Services:

Net Factor Income:Net Factor Income:Net Unilateral Transfers:Net Unilateral Transfers:CA Balance: CA Balance: $80M$80M

Capital & Financial AccountCapital & Financial AccountForeign acquisition of US assets:Foreign acquisition of US assets:

US Treasuries:US Treasuries:Private Securities: Private Securities: $20M$20MFDI: FDI: Currency: Currency:

US acquisition of foreign assets:US acquisition of foreign assets: FDI: FDI: -$100M-$100MPortfolio Investment:Portfolio Investment:

Official Reserve AssetsOfficial Reserve AssetsForeign acquisition of US ORA:Foreign acquisition of US ORA:

US acquisition of foreign ORA:US acquisition of foreign ORA: KFA Balance: KFA Balance: -$80M-$80M

BOP (China)BOP (China)Current AccountCurrent AccountExports Exports

Goods:Goods:Services:Services:

ImportsImportsGoods: -Goods: -$90M$90MServices:Services:

Net Factor Income:Net Factor Income:Net Unilateral Transfers:Net Unilateral Transfers:CA Balance: CA Balance: -$90M-$90M

Capital & Financial AccountCapital & Financial AccountAcquisition of Foreign assets:Acquisition of Foreign assets:

US Treasuries:US Treasuries:Private Securities: Private Securities: -$10M-$10MFDI: FDI: Currency: Currency:

Foreign acquisition of Domestic Foreign acquisition of Domestic assets:assets: FDI: FDI: $100M$100MPortfolio Investment:Portfolio Investment:

Official Reserve AssetsOfficial Reserve AssetsForeign acquisition of Domestic Foreign acquisition of Domestic

ORA:ORA:

Acquisition of Foreign ORA:Acquisition of Foreign ORA: KFA Balance: KFA Balance: $90M$90M

Question #5Question #5

Suppose that US citizens invest $10M in Suppose that US citizens invest $10M in Russian companies. Russian companies. $3M is used to pay Russian workers$3M is used to pay Russian workers $2M is used to purchase supplies from $2M is used to purchase supplies from

EuropeEurope $3M is used to purchase US Treasury Bills$3M is used to purchase US Treasury Bills $2M is used to buy protection from the $2M is used to buy protection from the

Russian Mob (who deposit the funds in a Russian Mob (who deposit the funds in a Swiss bank account)Swiss bank account)

What will the Russian BOP accounts look like?What will the Russian BOP accounts look like?

BOP (Russia)BOP (Russia)Current AccountCurrent AccountExports Exports

Goods:Goods:Services:Services:

ImportsImportsGoods: Goods: -$2-$2Services:Services:

Net Factor Income:Net Factor Income:Net Unilateral Transfers:Net Unilateral Transfers:CA Balance: CA Balance: -$2-$2

Capital & Financial AccountCapital & Financial AccountAcquisition of Foreign assets:Acquisition of Foreign assets:

US Treasuries: US Treasuries: -$3M-$3MPrivate Securities:Private Securities:FDI: FDI: Currency: Currency: -$3M-$3M

Foreign acquisition of Domestic Foreign acquisition of Domestic assets:assets: FDI:FDI:Portfolio Investment: Portfolio Investment: $10M$10M

Official Reserve AssetsOfficial Reserve AssetsForeign acquisition of Domestic Foreign acquisition of Domestic

ORA:ORA:

Acquisition of Foreign ORA:Acquisition of Foreign ORA: KFA Balance: KFA Balance: $4M$4MStatistical Discrepancy: $2MStatistical Discrepancy: $2M

Question #6Question #6

Suppose that the EUR/USD Suppose that the EUR/USD exchange rate is $1.35 per Euro. If exchange rate is $1.35 per Euro. If the US price level is $112 and the the US price level is $112 and the European price index is E105, what European price index is E105, what is the real exchange rate between is the real exchange rate between the US and Europe?the US and Europe?

Real Exchange Rate =

eP*

P

(1.35)(105)

112= = 1.27

Question #7Question #7 Suppose that the exchange rate between the Suppose that the exchange rate between the

US and Mexico is $0.50 per Peso. Baseballs US and Mexico is $0.50 per Peso. Baseballs cost $15 in the US and P 20 in Mexico. How cost $15 in the US and P 20 in Mexico. How could you make money and what would your could you make money and what would your profits be? (zero shipping costs, tariffs, etc)profits be? (zero shipping costs, tariffs, etc)

PPP Implied Exchange Rate

= $15P 20

= $ .75 per Peso

(The Peso is Undervalued)

Buy in Mexico, Sell in the US: Profit = $15 – (P20)(.50) = $5

Question #8Question #8 Suppose that a steel costs $400/ton in the US and C$ Suppose that a steel costs $400/ton in the US and C$

600/ton in Canada. There are no shipping costs, but the 600/ton in Canada. There are no shipping costs, but the US imposes a 10% import tariff on imported steel. US imposes a 10% import tariff on imported steel. Within what range should the CAD/USD exchange rate Within what range should the CAD/USD exchange rate fluctuate?fluctuate?

PPP Implied Exchange Rate

= $400CD 600

= .67

Buy in US, Sell in Canada

Profit = eP* - P = 0

e = .67

Buy in Canada, Sell in US

Profit = P – eP*(1.10) = 0

e = .61

Exchange rate can fluctuate between .61 and .67

Question #9Question #9

US inflation has averaged 3.5% while in US inflation has averaged 3.5% while in Denmark, the inflation rate has averaged 2%. Denmark, the inflation rate has averaged 2%. Over the past year, the Krone has appreciated Over the past year, the Krone has appreciated from 8K/$ to 6K/$. What has happened to the from 8K/$ to 6K/$. What has happened to the real exchange rate? Does this suggest a possible real exchange rate? Does this suggest a possible profit opportunity?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

Question #10Question #10

Suppose that we have the following Suppose that we have the following inflation data in the US and Europe:inflation data in the US and Europe: US Tradable Goods: 10%US Tradable Goods: 10% US Non-Tradable Goods: 15%US Non-Tradable Goods: 15% European Tradable Goods: 5%European Tradable Goods: 5% European Non-Tradable Goods: 5%European Non-Tradable Goods: 5%

If price indices in both Europe and US are If price indices in both Europe and US are defined asdefined as P = .5(Tradables) + .5(Non-Tradables)P = .5(Tradables) + .5(Non-Tradables)

What should happen to the real and nominal What should happen to the real and nominal exchange rates between the US and Europe?exchange rates between the US and Europe?

Question #10Question #10

For Simplicity, assume that all prices are initially 1.For Simplicity, assume that all prices are initially 1.

1

1

1*

**

RERe

PP

PPPP NTTNTT

The following year we have the following.The following year we have the following.

05.1)05.1)(5(.)05.1)(5(.

125.1$)15.1)($5(.)10.1)($5(.

05.1

15.1$,10.1$

*

**

EEEP

P

EPP

PP

NTT

NTT

Question #10Question #10

The nominal exchange rate adjusts according The nominal exchange rate adjusts according to the law of one price (for tradables).to the law of one price (for tradables).

EEP

Pe /05.1$

05.1

10.1$*

The real exchange rate adjusts according to the following.The real exchange rate adjusts according to the following.

98.125.1

)05.1)(05.1(*

P

ePRER

A 5% Nominal Depreciation

A 2% Real Appreciation

Lightning RoundLightning Round

IsraelIsrael AustraliaAustralia PhilippinesPhilippines AustriaAustria IranIran IndiaIndia South AfricaSouth Africa SwedenSweden ThailandThailand South KoreaSouth Korea

Name the Following Country’s Name the Following Country’s currencycurrencyShekelShekel

DollarDollar

PesoPeso

EuroEuro

RialRial

RupeeRupee

RandRandKronaKrona

BahtBaht

WonWon

ShillingShilling