College BowlCollege Bowl

Round #2Round #2

Question #1Question #1

Following WWII, the international Following WWII, the international financial system was defined by financial system was defined by the Bretton Woods system of the Bretton Woods system of Fixed exchange rates. Fixed exchange rates.

In what state is Bretton Woods In what state is Bretton Woods located?located?

In what year did the Bretton Woods In what year did the Bretton Woods system end and why?system end and why?

Question #1Question #1

The Bretton Woods agreement The Bretton Woods agreement was signed in was signed in Bretton Woods, Bretton Woods, New HampshireNew Hampshire

The Bretton Woods system ended The Bretton Woods system ended in in August, 1971August, 1971 when Nixon when Nixon closed the gold window – ending closed the gold window – ending the ties between the dollar and the ties between the dollar and gold.gold.

Question #2Question #2

Suppose the current we have the Suppose the current we have the following exchange rates:following exchange rates:

EUR/USD = 1.35EUR/USD = 1.35CHF/USD = .85CHF/USD = .85

What is the What is the CHF/EURCHF/EUR exchange rate? exchange rate?

CHF/EUR = .63 (EUR/CHF = 1.59)CHF/EUR = .63 (EUR/CHF = 1.59)

Question #3Question #3

Suppose that the current AUD/USD exchange Suppose that the current AUD/USD exchange rate is .77, the CPI in the US is 112 and the rate is .77, the CPI in the US is 112 and the CPI in Australia is 102. CPI in Australia is 102.

What is the real exchange rate between What is the real exchange rate between Australia and the US?Australia and the US?

RER = eP*P = .70 US Goods per Australian Good

1.43 Australian Goods per US Good

Question #4Question #4 Suppose that Warren Buffet purchases a Suppose that Warren Buffet purchases a

10 year, E100,000 bond with a 5% annual 10 year, E100,000 bond with a 5% annual coupon payment from the ECB. He pays coupon payment from the ECB. He pays E105,000 for it.E105,000 for it. The exchange rate is The exchange rate is $1.30 per Euro and is not expected to $1.30 per Euro and is not expected to change.change.

How would this be recorded in the balance How would this be recorded in the balance of payments this year? (Remember, the of payments this year? (Remember, the US BOP are recorded in $s)US BOP are recorded in $s)How would this be recorded next year?How would this be recorded next year?

BOP (This Year)BOP (This Year)Current AccountCurrent AccountExports Exports

Goods: Goods: Services:Services:

ImportsImportsGoods:Goods:Services:Services:

Net Factor Income:Net Factor Income:Net Unilateral Transfers:Net Unilateral Transfers:CA Balance: CA Balance: $0$0

Capital & Financial AccountCapital & Financial AccountForeign acquisition of US assets:Foreign acquisition of US assets:

US Treasuries:US Treasuries:Private Securities: Private Securities: FDI: FDI: Currency: Currency: $136,500$136,500

US acquisition of foreign assets:US acquisition of foreign assets: FDI: FDI: Portfolio Investment: Portfolio Investment: -$136,500-$136,500

Official Reserve AssetsOfficial Reserve AssetsForeign acquisition of US ORA:Foreign acquisition of US ORA:

US acquisition of foreign ORA:US acquisition of foreign ORA: KFA Balance: KFA Balance: $0$0

BOP (This Year)BOP (This Year)Current AccountCurrent AccountExports Exports

Goods: Goods: Services:Services:

ImportsImportsGoods:Goods:Services:Services:

Net Factor Income: Net Factor Income: $6,500$6,500Net Unilateral Transfers:Net Unilateral Transfers:CA Balance: CA Balance: $6,500$6,500

Capital & Financial AccountCapital & Financial AccountForeign acquisition of US assets:Foreign acquisition of US assets:

US Treasuries:US Treasuries:Private Securities: Private Securities: FDI: FDI: Currency: Currency:

US acquisition of foreign assets:US acquisition of foreign assets: FDI: FDI: Portfolio Investment: Portfolio Investment: -$6,500-$6,500

Official Reserve AssetsOfficial Reserve AssetsForeign acquisition of US ORA:Foreign acquisition of US ORA:

US acquisition of foreign ORA:US acquisition of foreign ORA: KFA Balance: KFA Balance: -$6,500-$6,500

Question #5Question #5

Suppose that the Oil counts for 30% Suppose that the Oil counts for 30% of the US CPI and 60% of the Saudi of the US CPI and 60% of the Saudi Price index. Price index.

If OPEC decides to raise the price of If OPEC decides to raise the price of oil worldwide by 25% , what will oil worldwide by 25% , what will happen to the nominal and real happen to the nominal and real exchange rate between the US and exchange rate between the US and Saudi Arabia?Saudi Arabia?

Question #5Question #5

For Simplicity, assume that all prices are initially 1.For Simplicity, assume that all prices are initially 1.

1

1

1*

**

RERe

PP

PPPP otheroilotheroil

The following year we have the following.The following year we have the following.

15.1)00.1)(4(.)25.1)(6(.

075.1$)00.1)($7(.)25.1)($3(.

00.1,25.1

00.1$,25.1$

*

**

RRRP

P

RPRP

PP

otheroil

otheroil

Question #5Question #5

The nominal exchange rate adjusts according The nominal exchange rate adjusts according to the law of one price.to the law of one price.

RP

P

P

Pe

other

other

oil

oil /$00.1$*

The real exchange rate adjusts according to the following.The real exchange rate adjusts according to the following.

070.1075.1

)15.1)(00.1(*

P

ePRER

No Change in the Nominal Exchange Rate

A 7% Real Depreciation

Question #6Question #6 Suppose we have the following trade data: Suppose we have the following trade data:

US Exports (to the rest of the World): $100MUS Exports (to the rest of the World): $100MUS Imports (from Europe): $150MUS Imports (from Europe): $150M

Assume that we have no exports to Europe. Assume that we have no exports to Europe. The current exchange rate is $1.50 per Euro The current exchange rate is $1.50 per Euro and the elasticity of import demand in the US and the elasticity of import demand in the US is 2. What would the exchange rate need to be is 2. What would the exchange rate need to be to eliminate the trade deficit?to eliminate the trade deficit?

Question #6Question #6

We need to lower our expenditures by 33% We need to lower our expenditures by 33% (from $150M to $100M). (from $150M to $100M).

Each 1% depreciation of the dollar increases Each 1% depreciation of the dollar increases import prices by 1%import prices by 1%

Percentage Change in Expenditures

=Percentage Change in Price

(1 – Elasticity)*

(-33%)(-33%) 22

We need the dollar to depreciate by 33% to $2.00/Euro!We need the dollar to depreciate by 33% to $2.00/Euro!

Question #7Question #7 Suppose that you were interested in taking a long Suppose that you were interested in taking a long

position in 3 month Futures for GBP. Currently, position in 3 month Futures for GBP. Currently, the GBP is selling for $1.80, the 1 year TBill rate the GBP is selling for $1.80, the 1 year TBill rate in the US is 3% while the British interest rate is in the US is 3% while the British interest rate is 4%. What price would you pay for the future?4%. What price would you pay for the future?

i – i* = Forward Premium/Discount

= Forward Premium/Discount = -.25% (The interest rates are on an annual basis)

i – i*44

F = (1.80)(1 - .0025) = 1.7955F = (1.80)(1 - .0025) = 1.7955

I would accept F = (1.80)(1 - .01) = 1.782I would accept F = (1.80)(1 - .01) = 1.782

Question #8Question #8

Suppose you purchase a call option on Suppose you purchase a call option on C$100,000 Canadian dollars with a strike price C$100,000 Canadian dollars with a strike price of $.75. On settlement day, the spot price of of $.75. On settlement day, the spot price of Canadian dollars is $.80. What is your payout Canadian dollars is $.80. What is your payout from the option?from the option?

Payout = (.05)(100,000) = $5,000Payout = (.05)(100,000) = $5,000

Question #9Question #9

Suppose that inflation over the past year Suppose that inflation over the past year was 5% in Europe and 3% in the US. was 5% in Europe and 3% in the US. Further, due to relative price changes, the Further, due to relative price changes, the US has experienced a 6% real depreciation US has experienced a 6% real depreciation relative to Europe. What is the percentage relative to Europe. What is the percentage change in the EUR/USD exchange rate?change in the EUR/USD exchange rate?

% Change in RER = % Change in e Inflation* - Inflation+

6%6% 5%5% 3%3%4%4%

A 4% Nominal Depreciation

Question #10Question #10

Suppose that a 1 year call option on Suppose that a 1 year call option on Euros with a strike price of $1.35 is Euros with a strike price of $1.35 is selling for $.08 per Euro. If the selling for $.08 per Euro. If the interest rate is 4%, and the current spot interest rate is 4%, and the current spot rate is $1.35, what is the fair price for a rate is $1.35, what is the fair price for a 1 year Euro put with a strike price of 1 year Euro put with a strike price of $1.35?$1.35?Call Call PricePrice + +

Strike PriceStrike Price(1+i)(1+i)

= Put Price + exchange rate= Put Price + exchange rate

$.08 $1.35/1.04 $1.35$.03

Lightning RoundLightning Round

How many of the following sentences can you How many of the following sentences can you complete? (EX. 26 = L. in the A.: 26 Letters in complete? (EX. 26 = L. in the A.: 26 Letters in the Alphabet)the Alphabet)

8 = S. on a S.S 8 = S. on a S.S

2 = N. it takes to T. 2 = N. it takes to T.

64 = S. on a C. 64 = S. on a C.

1,000 = W. that a P. is W.1,000 = W. that a P. is W.

3 = B. M. (S. H. T. R.)3 = B. M. (S. H. T. R.)

Signs on a Stop SignSigns on a Stop Sign

Number it Takes to TangoNumber it Takes to Tango

Squares on a CheckerboardSquares on a Checkerboard

Words that a Picture is WorthWords that a Picture is Worth

Blind Mice (See How They Run)Blind Mice (See How They Run)

Lightning RoundLightning Round

How many of the following sentences can you How many of the following sentences can you complete? (EX. 26 = L. in the A.: 26 Letters in complete? (EX. 26 = L. in the A.: 26 Letters in the Alphabet)the Alphabet)

12 = S. of the Z. 12 = S. of the Z.

4 = Q. in a G. 4 = Q. in a G.

100 = B. of B. on the W. 100 = B. of B. on the W.

12 = D. of C. 12 = D. of C.

88 = P. K. 88 = P. K.

Signs of the ZodiacSigns of the Zodiac

Quarts in a GallonQuarts in a Gallon

Bottles of Beer on the WallBottles of Beer on the Wall

Days of ChristmasDays of Christmas

Piano KeysPiano Keys