FINANCE

Thefollowingpagescontainannualdataoninterestrates,inflationrates,andpercentagechange inexchangerates(basedonindirectquotes)forforeigncountries,includingtheUS,forthe period1995-2007.

My Country is Switzerland, years I need to do is 2001-2006.

I am little lost what to do…

Eachoneof youisassignedtoaforeigncountryandasix-yeartimeperiod(1995-2000 or2001-2006).Pleaseconsulttheattachedlisttodetermineyourassignedcountryand

timeperiod.

Pleaseusetheattachedsheetstoanswerthequestionslistedbasedoncalculationsusingthedata fortheassignedcountryandtheUSduringtheassignedtimeperiod.

Usegeometricinsteadof arithmeticaverages. Useexactinsteadof theapproximatemethod.

Thereisonlyonecorrectanswertothesequestions.Youwillbegradedonwhetherornot youranswersarecorrect.

ThenecessaryinformationandconceptsareallfromChapter4. Iwilldiscussthesolutiontechniquestotheseproblemsonlyduringclass.Iwillnotdiscussthemwithanyoneonanindividualbasisoutsidetheclass.

Q1.Duringtheassignedtimeperiod:

USdollarappreciated/depreciated(chooseone)inrealtermsagainstthecurrencyofforeign country.

Q2.Duringtheassignedperiod,whatwastheaverageuncoveredrateofreturnfromtheUS

viewpointfortheforeigncountry?

Q3.Duringtheassignedperiod,whatwastheaverageuncoveredrateofreturnfromtheforeigncountry’sviewpoint?

Q4.Basedonyouranswerstoquestions2 and3,givenperfecthindsightaboutinterestratesandexchangeratechangesduringtheassignedtimeperiodyoushouldhave:

Invested/borrowed(chooseone)intheUSandinvested/borrowed(chooseone)inforeigncountry.

Q5.Assumethatyoucouldbothborrowandinvestattheaverageinterestratesprevailingin foreigncountryandintheUSduringtheassignedtimeperiod.Alsoassumethatyouhave aline ofcreditforonemilliondollarsintheUSoranequivalentamountinforeigncountry.Given perfecthindsightaboutinterestratesandexchangeratechanges,pleasecalculateyourtotal profit in dollarsusinguncoveredinterestarbitrageduringtheassignedtimeperiodifyou followedthestrategychoseninQ4.

Country CANADA Four-yeartimeperiod 1998 1999 2000 2001 GeomAvg InflationRate:US 1.5 2.2 3.4 2.8 InflationRate:ForeignCountry 1.0 1.7 2.7 2.5 InterestRate:US 5.5 5.3 6.5 3.7 InterestRate:ForeignCountry 5.0 5.2 5.8 2.1 %ChangeinCDSR(Indirectquote) 7.10 0.10 0.00 4.3 %ChangeinCDSR(Directquote) =[1/(1+%changeinIQ)]-1 PPPImplications: AnnualUncoveredRate(forUS) AnnualUncoveredRate(forCanada) SuggestinvestmentstrategybasedonIFE:

Work Sheet: Statistical Report

GeometricandArithmeticMeansofRatesandPercentages

Iftheratesforyears1,2,3,…NareR1,R2,R3,….RN,thenyoucancalculatethearithmeticandgeometricmeanoraverages oftheseratesovertheNyears,asfollows:

ArithmeticMean       =      (R1+R2  +R3+..+RN)/N

GeometricMean       =      [(1+R1)*(1+R2)*(1+R3)***(1+RN)]

1/N-1

Note,thatinthegeometricmeanformula,thepercentagesarewrittenindecimals.Forexample,weuse0.10insteadof10% and-0.02insteadof-2%.AlsointheendwetaketheNthrootoftheproduct,whereNisthenumberofyearsintheaveraging period.

Itisimportanttoknowthatthegeometricmeanisamoreaccuratemeasurethanthearithmeticmean.Alwaystryto usethegeometricmeanmethodwhencalculatingaveragesofrateofreturnsorpercentages.

Letusassumethefollowingratesofreturnforthefiveyearperiod(2000-2004):

	2000	2001	2002	2003	2005
Ratesofreturn	4.75%	-8%	0.5%	23%	7%

Ourestimateoftheaveragerateofreturnoverthe2000-04periodbasedon: ArithmeticMean   =(0.0475-0.08+0.005+0.23+0.07)/5=0.0545=5.45%

GeometricMean    =[(1+0.0475)*(1-0.08)*(1+0.005)*(1+0.23)*(1+0.07)]1/5-1

=(1.02746672)1/5-1

=0.04973=4.973%

4.973%isamoreaccuratemeasureoftheaveragereturnoverthe2000-04periodthan5.45%

ConsumerPriceIndex

Percentchangefromyearago

	1995	1996	1997	1998	1999	2000	2001	2002	2003	2004	2005	2006	2007
Australia	4.6	2.6	0.2	0.9	1.5	4.5	4.4	3.0	2.8	2.3	2.7	3.5	2.3
Austria	1.6	1.8	1.2	0.8	0.5	2.0	2.3	1.7	1.3	2.0	2.1	1.7	2.2
Canada	2.1	1.6	1.6	1.0	1.7	2.7	2.5	2.3	2.8	1.9	2.2	2.0	2.1
Chile	8.2	7.4	6.1	5.1	3.3	3.8	3.6	2.5	2.8	1.1	3.0	3.4	4.4
China	17.1	8.3	2.8	-0.9	-1.4	0.3	0.5	-0.8	1.2	3.9	1.8	1.5	4.8
Denmark	2.1	2.1	2.2	1.8	2.5	2.9	2.4	2.4	2.1	1.2	1.8	1.9	1.7
EuroArea	2.6	2.1	1.7	1.2	1.1	2.2	2.4	2.3	2.1	2.1	2.2	2.2	2.1
Finland	0.4	1.1	1.2	1.3	1.3	2.9	2.7	2.0	1.3	0.1	0.8	1.3	1.6
France	1.8	2.1	1.3	0.7	0.6	1.8	1.8	1.9	2.2	2.3	1.9	1.9	1.6
Germany	.	1.2	1.5	0.6	0.6	1.4	1.9	1.4	1.0	1.8	1.9	1.8	2.3
Greece	.	7.9	5.4	4.5	2.1	2.9	3.7	3.9	3.4	3.0	3.5	3.3	3.0
Indonesia	9.4	8.0	6.2	58.4	20.5	3.7	11.5	11.9	6.6	6.2	10.5	13.1	6.4
Ireland	.	2.2	1.3	2.1	2.5	5.3	4.0	4.7	4.0	2.3	2.2	2.7	2.9
Israel	10.0	11.3	9.0	5.5	5.2	1.1	1.1	5.7	0.7	-0.4	1.3	2.1	0.5
Italy	5.4	4.0	1.9	2.0	1.7	2.6	2.3	2.6	2.8	2.3	2.2	2.2	2.0
Japan	-0.1	0.1	1.8	0.7	-0.3	-0.7	-0.8	-0.9	-0.2	-0.0	-0.3	0.2	0.1
Korea	4.5	4.9	4.4	7.5	0.8	2.3	4.0	2.8	3.5	3.6	2.8	2.2	2.5
Malaysia	3.4	3.5	2.7	5.3	2.7	1.5	1.4	1.8	1.0	1.5	3.0	3.6	2.0
Mexico	35.0	34.4	20.6	15.9	16.6	9.5	6.4	5.0	4.5	4.7	4.0	3.6	4.0
Netherlands	1.4	1.5	1.9	1.8	2.0	2.3	5.1	3.9	2.2	1.4	1.5	1.7	1.6
NewZealand	3.8	2.3	1.2	1.3	-0.1	2.6	2.6	2.7	1.8	2.3	3.0	3.4	2.4
Norway	2.4	1.2	2.6	2.3	2.3	3.1	3.0	1.3	2.5	0.5	1.5	2.3	0.7
Philippines	8.0	9.0	5.9	9.7	6.7	-0.2	6.8	3.0	3.6	5.9	7.6	6.3	2.8
Singapore	1.7	1.4	2.0	-0.3	0.0	1.4	1.0	-0.4	0.5	1.6	0.5	1.0	2.1
SouthAfrica	8.7	7.4	8.6	6.9	5.2	5.3	5.7	9.2	5.9	1.4	3.4	4.6	7.1
Spain	4.6	3.6	1.9	1.8	2.2	3.5	2.8	3.6	3.1	3.1	3.4	3.6	2.8
Sweden	2.5	0.5	0.7	-0.3	0.5	0.9	2.4	2.2	1.9	0.4	0.5	1.4	2.2
Switzerland	1.8	0.8	0.5	0.0	0.8	1.6	1.0	0.6	0.6	0.8	1.2	1.1	0.7
Thailand	5.8	5.8	5.6	8.1	0.3	1.6	1.7	0.6	1.8	2.8	4.6	4.6	2.2
Turkey	89.1	80.4	85.7	84.6	64.9	54.9	54.4	45.0	21.6	8.6	8.2	9.6	8.8
UnitedKingdom	2.7	2.5	1.8	1.6	1.3	0.8	1.2	1.3	1.4	1.3	2.1	2.3	2.3
UnitedStates	2.8	2.9	2.3	1.5	2.2	3.4	2.8	1.6	2.3	2.7	3.4	3.2	2.9
Venezuela	60.0	99.8	50.0	35.8	23.6	16.2	12.5	22.4	31.1	21.7	16.0	13.6	18.7

ResearchDivision

FederalReserveBankofSt.Louis                                                                                                                                                                                                                                           7

Exchange Rates

Percentappreciation(+)ordepreciation(-)oftheU.S.dollaragainstthelocalcurrency

	1995	1996	1997	1998	1999	2000	2001	2002	2003	2004	2005	2006	2007
Australia	-1.3	-5.3	5.3	18.1	-2.4	11.0	12.5	-4.9	-16.7	-11.5	-3.4	1.2	-10.1
Canada	0.5	-0.7	1.6	7.1	0.1	-0.0	4.3	1.4	-10.8	-7.1	-6.9	-6.4	-5.3
Chile	-5.6	3.9	1.7	9.8	10.5	6.1	17.7	8.5	0.4	-11.8	-8.2	-5.3	-1.5
China	-3.1	-0.4	-0.2	-0.2	-0.3	0.0	-0.0	0.0	0.0	-0.0	-1.0	-2.7	-4.6
Denmark	-11.8	3.5	13.9	1.4	4.2	15.9	2.9	-5.3	-16.6	-9.0	0.1	-0.9	-8.4
EuroArea	-8.7	2.3	13.9	1.6	4.4	15.5	3.1	-5.3	-16.5	-9.0	-0.1	-0.9	-8.4
Indonesia	4.1	4.2	24.2	244.2	-21.6	7.2	21.8	-9.3	-7.9	4.2	8.6	-5.6	-0.2
Israel	0.0	6.0	8.1	10.2	8.9	-1.5	3.1	12.7	-3.9	-1.6	0.1	-0.7	-7.8
Japan	-7.9	15.6	11.3	8.0	-13.1	-5.2	12.7	3.1	-7.5	-6.7	1.8	5.6	1.2
Korea	-4.2	4.2	18.5	47.2	-15.3	-4.9	14.2	-3.2	-4.7	-3.9	-10.6	-6.8	-2.6
Malaysia	-4.4	0.3	12.0	39.3	-3.2	0.0	0.0	0.0	-0.0	0.0	-0.3	-3.2	-6.3
Mexico	90.2	18.4	4.2	15.4	4.6	-1.1	-1.2	3.4	11.7	4.6	-3.4	0.0	0.3
NewZealand	-9.5	-4.6	3.8	23.4	1.4	15.9	8.7	-9.5	-20.2	-12.4	-5.7	8.4	-11.7
Norway	-10.2	1.9	9.6	6.6	3.3	12.9	2.1	-11.2	-11.4	-4.8	-4.4	-0.5	-8.7
Philippines	-2.7	2.0	12.4	38.8	-4.4	13.1	15.4	1.2	5.0	3.4	-1.7	-6.8	-10.1
Singapore	-7.2	-0.5	5.4	12.5	1.4	1.8	3.9	-0.1	-2.7	-3.0	-1.5	-4.6	-5.2
SouthAfrica	2.1	18.5	7.2	20.0	10.6	13.6	24.2	21.9	-28.2	-14.7	-1.4	6.4	4.2
Sweden	-7.5	-6.0	13.9	4.1	3.9	11.0	12.7	-6.0	-16.9	-9.1	1.7	-1.3	-8.4
Switzerland	-13.5	4.6	17.3	-0.1	3.7	12.5	-0.1	-7.8	-13.6	-7.6	0.3	0.6	-4.3
Thailand	-0.9	1.7	22.5	33.0	-8.3	6.2	10.7	-3.3	-3.4	-3.1	-0.1	-5.9	-15.0
Turkey	54.8	77.6	86.6	71.7	60.6	49.3	96.0	23.0	-0.4	-5.0	-5.7	6.3	-8.8
UnitedKingdom	-2.9	1.1	-4.7	-1.2	2.4	6.7	5.3	-4.2	-8.1	-10.8	0.7	-1.3	-7.9
UnitedStates1	-5.6	4.5	7.7	4.8	-1.6	4.9	6.0	-1.5	-12.3	-8.2	-1.9	-1.5	-5.6
Venezuela	19.0	136.1	17.1	12.0	10.6	12.3	6.5	60.4	38.4	17.7	10.5	2.7	0.0

1 Percentappreciation(+)ordepreciation(-)oftheU.S.dollaragainstagroupofcurrencies

ResearchDivision

FederalReserveBankofSt.Louis                                                                                                                                                                                                                                          11

Short-TermInterestRates

Annualpercent

	1995	1996	1997	1998	1999	2000	2001	2002	2003	2004	2005	2006	2007
Australia	7.7	7.2	5.4	5.0	5.0	6.2	4.9	4.7	4.9	5.5	5.6	6.0	6.7
Canada	5.9	3.1	4.6	5.0	5.2	5.8	2.1	2.9	2.7	2.6	3.5	4.3	4.8
Chile	13.7	13.5	12.0	14.9	8.6	9.2	6.2	3.8	2.7	1.9	3.9	5.1	5.6
China	10.4	9.0	8.6	4.6	3.2	3.2	3.2	2.7	2.7	3.3	3.3	3.3	3.3
Denmark	6.1	3.9	3.7	4.1	3.3	4.9	4.6	3.5	2.4	2.1	2.2	3.1	4.3
EuroArea	6.8	5.1	4.4	4.0	3.0	4.4	4.3	3.3	2.3	2.1	2.2	3.1	4.3
Indonesia	16.7	17.3	20.0	39.1	25.7	12.5	15.5	15.5	10.6	6.4	8.1	11.4	8.0
Israel	14.4	15.3	13.4	11.3	11.4	8.8	6.5	7.4	7.0	4.8	4.3	5.5	.
Japan*	1.2	0.6	0.6	0.7	0.2	0.2	0.1	0.1	0.0	0.0	0.0	0.2	0.7
Korea	12.6	12.4	13.3	15.0	5.0	5.2	4.7	4.2	4.0	3.7	3.4	4.2	4.8
Malaysia	5.5	6.4	6.4	6.9	3.5	2.9	2.8	2.7	2.8	2.4	2.5	3.2	3.4
Mexico	48.2	32.9	22.3	27.1	24.6	17.2	13.4	8.5	7.2	7.4	9.6	7.7	7.8
NewZealand	9.0	9.3	7.7	7.3	4.8	6.5	5.7	5.7	5.4	6.1	7.1	7.5	8.3
Norway	5.5	4.9	3.7	5.8	6.5	6.7	7.2	6.9	4.1	2.0	2.2	3.1	5.0
Philippines	11.8	12.3	12.9	15.0	10.0	9.9	9.7	5.5	5.9	7.3	6.1	5.3	3.4
Singapore	2.6	2.9	4.4	5.0	2.0	2.6	2.0	1.0	0.7	1.0	2.3	3.5	2.7
SouthAfrica	13.5	15.0	15.3	16.5	12.9	10.1	9.7	11.2	10.7	7.5	6.9	7.3	9.1
Sweden	8.7	5.8	4.1	4.2	3.1	4.0	4.0	4.1	3.0	2.1	1.7	2.3	3.6
Switzerland	2.9	2.0	1.6	1.5	1.4	3.2	2.9	1.1	0.3	0.5	0.8	1.6	2.6
Thailand	10.3	12.1	21.7	2.6	1.2	1.7	2.1	1.6	1.0	1.8	3.8	4.9	3.2
Turkey	72.3	76.2	70.3	74.6	73.5	38.9	92.4	59.5	38.5	23.8	15.6	17.9	18.2
UnitedKingdom	6.7	6.0	6.8	7.3	5.4	6.1	5.0	4.0	3.7	4.6	4.7	4.8	6.0
UnitedStates	5.9	5.4	5.6	5.5	5.3	6.5	3.7	1.7	1.2	1.6	3.5	5.2	5.3
Venezuela	49.0	45.0	45.0	60.0	38.0	38.0	37.0	40.0	28.5	28.5	28.5	28.5	28.5

*Theactualvaluefor2003is0.037;theactualvaluefor2004is0.029;theactualvaluefor2005is0.029.

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