1. List the factors that affect currency put options, and briefly explain the relationship that exists for each.

2. Assume that the annual U.S. interest rate is currently 8% and Germany's annual interest rate is currently 9%. The euro's 1-year forward rate currently exhibits a discount of 2%.
(a) Does IRP exist?
(b) Can a U.S. firm benefit from investing funds in Germany using CIA?
(c) Can a German subsidiary of a U.S. firm benefit by investing funds in the United States through CIA?

3. Hudson Co., a U.S. firm, has a subsidiary in Mexico, where political risk has recently increased. Hudson's best guess of its future peso cash flows to be received has not changed. However, its valuation has declined as a result of the increase in political risk. Explain why.

.     For each of the following two situations, draw a diagram of the exchange rate market for U.S. dollars showing clearly the demand and supply of U.S. dollars in exchange for Japanese yen. Identify the initial equilibrium.

Next illustrate on the diagrams the impact of each of the following events. Then draw a conclusion on the resulting impact on the exchange rate.

(All axes, curves, and points should be clearly labeled to receive full credit)

1. An increased preference for American goods by Japanese consumers. For example, suppose that American firms come to dominate the video game market, with games that are more exciting and realistic than those produced in Japan. Or, Japanese airlines might find that U.S.-built aircraft are superior to others and decide to expand the number of American-made planes in their fleets.

2. The interest-rate on one-year Japanese government bonds rises relative to the interest rate on similar one-year U.S. Treasury bills. (4pts)

Q. The U.S. economy appears to be performing well: Output growth has returned to healthy levels, the labor market is firming, and inflation appears to be under control. But, one aspect of U.S. economic performance still evokes concern: the nation’s large and growing current account deficit (negative net exports). Most forecasters expect the nation’s current account imbalance to decline slowly at best, implying a continued need for foreign credit and a concomitant decline in the U.S. net foreign asset position.

a. Why is the United States, with the world’s largest economy, borrowing heavily on international capital markets—rather than lending, as would seem more natural? b. What implications do the U.S. current account deficit (negative net exports) and our reliance on foreign credit have for economic performance in the United States?

1. The following conditions exist in the foreign exchange market:

Current spot rate: 0.876 Euros / U.S. $

Annualized interest rate on 90-day dollar-denominated bonds: 4%

Annualized interest rate on 90-day Euro-denominated bonds: 3%

All financial investors expect the spot exchange rate to be 0.85 Euros / U.S. $ in 90 days.

1. If a U.S. investor bases decisions solely on the expected rate of return, should that investor buy Euro-denominated bonds or dollar-denominated bonds? Briefly explain.
2. If a European investor bases decisions solely on the expected rate of return, should that investor buy Euro-denominated bonds or dollar-denominated bonds? Briefly explain.
3. If these two investors’ decisions are typical of other investors in the U.S. and Europe, what pressure is placed on the current spot exchange rate? Which currency will depreciate and which one will appreciate?

First Amendament

At the beginning of the war in Iraq, the Qatar-based satellite news network al-Jazeera interviewed captured soldiers and took pictures of slain soldiers. The al-Jazeera footage showed U.S. soldiers being asked questions about their hometowns and their reasons for coming to Iraq. U.S. officials criticized the Iraqi government for allowing the television station to record the interviews and broadcast the footage. CBS News briefly showed a clip of the al-Jazeera tape, but stopped when the Pentagon emailed U.S. news organizations and asked them not to use the tape.

If CBS News had not voluntarily ceased showing the tape, could the U.S. government have obtained a court order preventing CBS News from broadcasting the footage? Why or why not? Explain the legal issues fully. What were the ethical issues that CBS News needed to consider in broadcasting the footage?

2. Triangular Currency Arbitrage

A)   Given $1.5271 / £ in NY, $0.9250 / € in Frankfurt, and €1.6645 / £ in London.

Identify if there exists a triangular arbitrage opportunity. What is your strategy to achieve your profit? How much is your triangular arbitrage profit starting with $1,000,000.

B) Assuming no transaction cost,

A:   You can buy a U.S. dollar for 10 pesos;     The bank will pay you 9 pesos for a U.S. dollar.

B:   You can buy a U.S. dollar for .9 euros;     The bank will pay you .8 Euros for a U.S. dollar.

C:   You can buy a euro for 14 pesos.              The bank will pay you 13 pesos for a euro.

Reorganize the above into $/peso (A), $/euro (B) and euro/peso (C) and identify if triangular arbitrage is possible. What is your trading strategy? Compute the triangular arbitrage profit starting with $1,000,000.

Suppose you purchase a 9-year AAA-rated Swiss bond for par that is paying an annual coupon of 6 percent and has a face value of 1,400 Swiss francs (SF). The spot rate is U.S. $0.66667 for SF1. At the end of the year, the bond is downgraded to AA and the yield increases to 8 percent. In addition, the SF depreciates to U.S. $0.74074 for SF1. a. What is the loss or gain to a Swiss investor who holds this bond for a year? (Input the amount as a positive value. Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16)) loss to Swiss investor %?

b. What is the loss or gain to a U.S. investor who holds this bond for a year? (Input the amount as a positive value. Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16)) gain to U.S. investor %?

New Hampshire Corp. has decided to issue​ three-year bonds in​ Russia, denominated in​ 5,000,000 Russian rubles at par. The bonds have an annual coupon rate of​ 17%. New Hampshire Corp does not expect to have ruble cash flows to repay the​ bonds, so they must convert U.S. dollars to rubles to make interest and principal payments on the bonds. The current spot rate is Rub​ 33.3333/$. Assume relative PPP holds between Russia and the U.S. If inflation in Russia is​ 5% and is​ 1% in the​ U.S., and is expected to remain constant over the​ three-year life of the​ bonds, what is the annual U.S. dollar financing cost of these​ bonds? ​ (HINT: Draw a timeline with the annual Rub cash​ flows, the annual exchange rates and the annual USD cash flows on​ it.)

A.

​10.66%

B.

​12.54%

C.

​14.87%

D.

​19.29%

A. In 2016 were foreign-born workers a bigger share of the U.S. labor force than in 2006? Explain, presenting and interpreting the relevant statistical evidence.

B. In 2016 who exhibited a higher labor force participation rate in the U.S., native- or foreign-born women? How does the evidence for 2016 compare with 2006, before the Great Recession? Present all relevant statistical evidence and interpret.

C. In 2016 who exhibited greater joblessness in the U.S., native- or foreign-born men? How does the evidence for 2016 compare with 2006, before the Great Recession? Present all relevant statistical evidence and interpret.

D. In 2016 who was more likely to have earned a bachelor’s degree or higher in the U.S., foreign- or native-born workers? Present and interpret relevant statistical evidence. Should you be “surprised” by your findings? Explain, using appropriate economic analysis.