Ok already, here are a few hints
Here are some hints to help you with the second homework.
1. Ok, this is just definitional. You should be able to figure it out. BTW, did you figure out that A and B are actually the same thing? And if you figured that out, you probably figured out C and D were the same thing too.
2. The class was informed that this problem was designed to get you to use the text. P. 388 in the 13th edition has an example of this "3-point arbitrage" or "triangular arbitrage". You can solve this in a number of different ways. Note that the first exchange rate is a dollar-yen exchange rate. So from the next two (dollar-kroner) and (yen-kroner) you can find the dollar-yen exchange rate. Now these two dollar-yen exchange rates should be equal, but they aren't. And since they aren't you should be able to profit. You'll want to sell your dollars cheap (initially) and buy them back dear (eventually). Well, you'll really want to do all three transactions at the same time. This is a puzzle problem. Solve it.
3. Are you getting the same answer for each one? Me too.
4. Just like we did in class and for the alternate assignment.
5. Just like we did in class and for the alternate assignment.
4 and 5 are just for more practice. Determine the interest rate differential. Determine the forward premium. Compare. Use the inequality to figure out the capital flows.
6. This is like 4 and 5 but rather than selling your currency forward today, you wait until the end of the period (hence the "expected spot rate").
1. Ok, this is just definitional. You should be able to figure it out. BTW, did you figure out that A and B are actually the same thing? And if you figured that out, you probably figured out C and D were the same thing too.
2. The class was informed that this problem was designed to get you to use the text. P. 388 in the 13th edition has an example of this "3-point arbitrage" or "triangular arbitrage". You can solve this in a number of different ways. Note that the first exchange rate is a dollar-yen exchange rate. So from the next two (dollar-kroner) and (yen-kroner) you can find the dollar-yen exchange rate. Now these two dollar-yen exchange rates should be equal, but they aren't. And since they aren't you should be able to profit. You'll want to sell your dollars cheap (initially) and buy them back dear (eventually). Well, you'll really want to do all three transactions at the same time. This is a puzzle problem. Solve it.
3. Are you getting the same answer for each one? Me too.
4. Just like we did in class and for the alternate assignment.
5. Just like we did in class and for the alternate assignment.
4 and 5 are just for more practice. Determine the interest rate differential. Determine the forward premium. Compare. Use the inequality to figure out the capital flows.
6. This is like 4 and 5 but rather than selling your currency forward today, you wait until the end of the period (hence the "expected spot rate").
posted by Atomic Kid at 4:20 AM
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