7. Hierarchy of international financial centers
Note: Size of dots (squares) indicates cities’ relative importance
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18. São Paulo
Rio de Janiero
Mexico
City
San
Francisco
New
York
Toronto
Bombay
Melbourne
Sydney
Tokyo
Hong Kong
Singapore
Paris
Zurich
Frankfurt
Amsterdam
Vienna
Madrid
Hamburg
Dusseldorf
Rome
Brussels
38. ge s
itu
a
ti
o
n
?
You are a currency trader in a :London Bank.
You have $2,200,000 that you can invest to get the highest rate
possible.
You see that interest rates in the US are 3% for a 90 day deposit
(or 12% per year)
Interest rates in the UK are 4.25% for a 90 day deposit.
The Spot rate between the $ and pound is $2.20 per pound
The 90 day forward rate is. $2.178.
What would you do? Could you take advantage of an arbitrage
situation?
2
IBUS 300 Problem Set
1. a. If the exchange rate changes from $1.70 per British
pound (₤1) to $1.68
39. per ₤1, has the pound (₤) appreciated or depreciated? Has the
dollar appreciated or depreciated?
b. What happens to the ₤-price that British residents pay
for a $500 U.S.
export good due to the exchange rate change above?
c. What happens to the $-price that U.S. residents pay
for a ₤1200 import
good from Britain?
d. How do these changes affect the economic welfare of
U.S. exporters and
U.S. importers?
2. a. If the exchange rate changes from $1.70 per British
pound (₤1) to $1.72
per ₤1, has the pound (₤) appreciated or depreciated? Has the
dollar appreciated or depreciated?
b. What happens to the ₤-price that British residents pay
for a $500 U.S.
export good due to the exchange rate change above?
c. What happens to the $-price that U.S. residents pay
for a ₤1200 import
good from Britain?
d. How do these changes affect the economic welfare of
U.S. exporters and
U.S. importers?
3. Suppose that the euro (€) appreciates from $1.00 per €1 to
$1.20 per €1. Determine whether the underlined individuals
listed below would see that appreciation as a good or a bad
thing.
40. a. A U.S. business buys €10,000 of chemicals from a
German company.
b. An Italian clothing company buys $100,000 of leather
from a U.S.
leather maker.
c. A U.S. resident has a retirement account totaling
€500,000 in a German
bank.
d. A U.S. company must make an interest payment of
€25,000 to the
French bank from which it borrowed last year.
4. You have an accounts payable to a German exporter for 100
Porsche Cayenne SUVs. The seller offers a 2 percent discount
for payment within 10 days and full payment due in 30 days
(2/10 net 30). Today the exchange rate is $1.40 per Euro. You
notice that the 30 day forward rate for the $/Euro is
$1.38…..what should you do? You owe 70,000 Euros for each
of the cars (before any discounts). [show your work!]
5. You are changing planes in London for a flight to Paris where
you will connect with your flight to Capetown. You are picking
up reading material for the flight and are looking at the prices
listed on the Economist magazine which conveniently lists
prices in several different global currencies. You note that the
price in Pounds is 2.40 pounds and the price in Euros is 2
Euros. The exchange rate for the dollar (your credit card was
issued in the USA) is $1.59/pound and $1.3837/euro. Should
you buy reading materials now or wait until you’re in Paris?
41. 6. You notice that the price of a Big Mac in Argentina is 40
pesos. Here in the USA the price is $4.00.
a. What is the purchasing power parity exchange rate between
Argentina and the USA?
b. If the actual exchange rate is 15 pesos to the $ is the
Argentine currency undervalued or overvalued.
c. Assume that inflation in Argentina during the next year is
expected to be 15% and that inflation in the USA is expected to
be around zero. What would you expect to happen to the $/peso
exchange rate?