janadityakumar123

Suppose 90-day investments in Britain have a 6% annualized return and a 1.5% quarterly (90-day) return. In the U.S., 90-day investments of similar risk have a 4% annualized return and a 1% quarterly (90-day) return. In the 90-day forward market, 1 British pound equals $1.65. If interest rate parity holds, what is the spot exchange rate?

Suppose you are working for an international investment firm, and you observe that the annualized return for 3-year Australian corporate bonds is 2.83% while and the annualized 3-year French corporate bonds is 3.58%.

1. You get the following quotes:

EA$/€ = 1.3653

3-year forward rate: FA$/€, 3-year = 1.3894

Is there any arbitrage opportunity?  If yes, what would you do?  If not, why?  Explain.  (8 points)

Note:  Assume your firm does not have any funds denominated in A$ and € and remember to do the interest rate conversion into appropriate time period (use the simple compounding method to covert annualized interest rate to the appropriate time period).

1. Suppose your firm can move the markets (i.e., change the spot exchange rate, the forward exchange rate, and the corporate bond yields in both countries), what happens to these four variables after the transactions you carried in part (a)? Explain in words.  (8 points)
2. Find the A$/€ spot rate such that your firm will be indifferent between holding the Australian corporate bonds and the French corporate bonds. (4 points)

Note:

• Keep your answers to 4 decimal points if needed.
• This question requires you to use the precise form of covered interest rate parity.
• Instead of the assumption made in class (individuals are small players and cannot affect the exchange rates and interest rates), the firm in this question is a LARGE player that has the ability to change the exchange rates and the corporate interest rates when it carries transactions in the spot exchange market, the forward exchange market, and corporate bonds markets in Australia and France.
• Use the subscripts “A” and “F” to represent all the variables and terms used for Australia and France respectively in your written explanation. You must use these notations; otherwise, you will receive a grade of ZERO for the whole question. 

Consider two economies, Home and Foreign.  The DC/FC exchange is determined by the asset approach to the exchange rate.

Both countries are identical in the following ways:

• Production function is given a typical Cobb-Douglas function: Y = AKαL(1-α).
• The (real) money demand is given by hY – kR,

where     h = fraction of income held in the form of money, 1> h > 0

k = sensitivity of money demand (MD) to a change in (nominal) interest rate. 

Home and Foreign differ in the following ways:

Home

Foreign

Level of total factor productivity

4

1

Supply of capital

50625

40000

Supply of labour

10000

62500

Capital’s share of income

0.25

0.5

Nominal money supply

67200

28080

Fraction of income held in the form of money

20%

30%

Sensitivity of MD to a change in (nominal) interest rate

8000

8000

Long-run nominal interest rate

10%

12%

Note: 

• Quote the exchange rate as EDC/FC.
• Interest rates are expressed in decimal points (i.e., if R = 0.1, then it is interpreted as 10%).
• Keep your answer to at least 4 decimal points.

1. Initially, both countries are in their respective long-run equilibrium.  Find the long-run levels of prices in both countries and the DC/FC exchange rate if the (initial) expected DC/FC exchange rate is given by the ratio of domestic price level to foreign price level.  (6 points)

Suppose there are permanent changes in the domestic money market such that the central bank of Home shrinks its balance sheet.  As such, the level of money supply changes by 10%.  At the same time, the sensitivity of (domestic) money demand (MD) to a change in (nominal) interest rate changes to 6000.  In addition, any permanent change will cause the market the to revise their expected exchange rate by 0.3474 DC per FC. 

1. Find the short-run equilibrium DC/FC exchange rate. (5 points)
2. Find the new long-run equilibrium levels of prices in both countries and the DC/FC exchange rate. (4 points).
3. Now, suppose the central bank of Foreign finds the change in the short-run exchange rate in part (b) undesirable and wants to keep it EDC/FC at 1.75 via a temporary change in monetary policy. Is it possible for the foreign central bank to achieve this goal?  Yes/No, explain.  (5 points)

Directions: Follow these steps to create sentences using figurative language.

1. Write two sentences that incorporate 'imagery' (all of your senses) to describe a place that you like to visit.

2. Write two original 'similes' (avoid cliches such as 'sly like a fox.')

3. Write one lines about each of the following topics using metaphors.

a. Dreams are..

b. My life is..

c. Work is..

d. Pain is..

e. Love is..

4. Use personification to describe the following items:

a. grass

b. ocean

c. a river

d. a house

e. stars

5. Write an example of 'alliteration' to describe your favorite activity.

6. Write an example of poetic 'apostrophe.'

7. Write an example of 'onomatopoeia.'

8. Write an example of 'hyperbole.'

9. Write an example of 'oxymoron.'

10. Write a poem of at least 5 lines using any of the figurative language. Then write a short explanation of the language you use and how it illustrates the concepts in the lesson.

Directions: Use what you have learned about figurative language to create vivid poems of your own.

1. Create three Haiku poems.

2. Create three Cinquain poems.

5. Do you see any similarities between how the Japanese Americans were treated then and how other ethnic groups are treated today in America? Explain.