Comments on Problem Set #2

For problem 5, make sure you look for "American style" options, rather than "European". For more exotic options, check out this page.

Comments from Thursday's Class

A copy of the notes used for discussions of futures and options, as well as covering similar objectives of hedging and speculating in the forward market, is available on my I drive (I:jjulian) in the folder for Econ 346.

As a followup to Mr. Barnacle's pooh poohing of a $75 profit on a $9,925 investment: Supposing that the option was exercised after holding it for a month (in class it was "a few weeks" or something like that), the return over one month would be 0.75%. Multiply that by 12 for an annualized rate of return: 0.75 x 12 months = 9.07%. That really isn't too shabby. ;-)

BTW, this assignment is due on Thursday, Feb. 24 (not 25th as indicated on the handout).

Power to the People!
Right on!
--John Lennon

Preparation for Test #1

Here is the answer key to the study problems. (I did this quickly so if you think some are wrong let's talk about it. jjulian@iup.edu)

1-D, 2-C, 3-B, 4-C, 5-D, 6-C, 7-C, 8-A, 9-D, 10-D,
11-C, 12-C, 13-D, 14-A, 15-D, 16-F, 17-C, 18-D,
19-A, 20-A, 21-A, 22-D, 23-D.

Material from problems 19-22 weren't really discussed in class yet. So you won't be required to know those yet.

Relevant readings for chapter 12:

pp. 357-368. Then in the section "Forwards and Futures", you only need to worry about Forward markets. Futures will be discussed later, as will be options. A more thorough treatment of the forward market comes later in the chapter.

Continue readings on p. 372-375 with "Exchange-rate determination"
Skip "Indexes of the fx value of the dollar: nominal and real exchange rates"
Continue readings on p. 377 with "Arbitrage". The section on Forward Markets follows. When the discussion turns to explaining the differences between forward and spot rates because of interest rates, you can stop reading. This leads to covered interest arbitrage which we'll discuss after this test is over.

I hope this is clear enough.

Comments on study problems:

A comment on #12 & 13: We infer there is a BoP deficit or surplus if there is any official intervention. There is evidence of official intervention in that table of numbers. A BoP deficit or surplus arises when counting all items except the official transactions by governments. So if there is said to be a BoP deficit, the sum of the current accounts and financial accounts would be less than zero. This is offset by an official transaction requiring a "credit" to offset the deficit.

Comment on #11: "capital account" should be interpreted as "financial account"

Suggested study questions from Carbaugh, Ch. 12 (pp. 391-392): 1-5, 9-11, 14, 16.