chap07 pbms mbf12e

1、Problem 7.1 - 7.5 The Latin American Big Mac Index: Historical ComparisonThis textbook has used The Economist magazine's Big Mac Index for many years. Below are the Big Mac prices and actual exchange rates for selec

2、t Latin American countries as printed in previous editions. Use the data in the table to complete the calculation of the implied PPP value of the currency versus the U.S. dollar and the calculation as to whether that cur

3、rency is undervalued (-%) or overvalued (+%) versus the U.S. dollar.April 1997 (1) (2) (3) (4) (5)Big Mac Actual Big Mac Implied Local currencyPrice in local exchange rate Prices in PPP of the under (-) / over (+)Country

4、 currency (April 7, 1997) dollars dollar valuationUnited States (dollar) 2.42 ---- 2.42 1.00Argentina (peso) 2.50 1.00 2.50 1.03 3.3%Brazil (reais) 2.97 1.06 2.80 1.23 15.8%Chile (peso) 1,200 417 2.88 496 18.9%Mexico (pe

5、so) 14.90 7.90 1.89 6.16 -22.1%March 1999 (1) (2) (3) (4) (5)Big Mac Actual Big Mac Implied Local currencyPrice in local exchange rate Prices in PPP of the under (-) / over (+)Country currency (March 30, 1999) dollars do

6、llar valuationUnited States (dollar) 2.43 ---- 2.43 1.00Argentina (peso) 2.50 1.00 2.50 1.03 2.9%Brazil (reais) 2.95 1.73 1.71 1.21 -29.8%Chile (peso) 1,250 484 2.58 514 6.3%Mexico (peso) 19.90 9.54 2.09 8.19 -14.2%April

7、 2002 (1) (2) (3) (4) (5)Big Mac Actual Big Mac Implied Local currencyPrice in local exchange rate Prices in PPP of the under (-) / over (+)Country currency (April 23, 2002) dollars dollar valuationUnited States (dollar)

8、 2.49 ---- 2.49 1.00Argentina (peso) 2.50 3.13 0.80 1.00 -67.9%Brazil (reais) 3.60 2.34 1.54 1.45 -38.2%Chile (peso) 1,400 655 2.14 562 -14.2%Mexico (peso) 21.90 9.28 2.36 8.80 -5.2%April 2005 (1) (2) (3) (4) (5)Big Mac

9、Actual Big Mac Implied Local currencyPrice in local exchange rate Prices in PPP of the under (-) / over (+)Country currency April 2005) dollars dollar valuationUnited States (dollar) 3.06 ---- 3.06 1.00Argentina (peso) 4

10、.75 2.90 1.64 1.55 -46.5%Brazil (reais) 5.90 2.47 2.39 1.93 -21.9%Chile (peso) 1,500 594 2.53 490 -17.5%Mexico (peso) 28.00 10.84 2.58 9.15 -15.6%Notes: Column 3 = Column 1 ÷ Column 2; Column 4 = Column 1 ÷ Big

11、 Mac US$ Price; Column 5 = Column 4 ÷ Column 2.Problem 7.7 Akira Numata -- CIA Japan Akira Numata, a foreign exchange trader at Credit Suisse (Tokyo), is exploring covered interest arbitrage possibilities. He wants

12、 to invest $5,000,000 or its yen equivalent, in a covered interest arbitrage between U.S. dollars and Japanese yen. He faced the following exchange rate and interest rate quotes:Assumptions Value Yen EquivalentArbitrage

13、funds available $5,000,000 593,000,000Spot rate (¥/$) 118.60180-day forward rate (¥/$) 117.80180-day U.S. dollar interest rate 4.800%180-day Japanese yen interest rate 3.400%Arbitrage Rule of Thumb: If the diff

14、erence in interest rates is greater than the forward premium/discount, or expected change in the spot rate for UIA, invest in the higher interest yielding currency. If the difference in interest rates is less than the fo

15、rward premium (or expected change in the spot rate), invest in the lower yielding currency.Difference in interest rates ( i ¥ - i $) -1.400%Forward premium on the yen 1.358%CIA profit potential -0.042%This tells Tos

16、hi Numata that he should borrow yen and invest in the HIGHER yielding currency, the U.S. dollar, to lock-in a covered interest arbitrage (CIA) profit.U.S. dollar interest rate (180 days)4.800%$ 5,000,000 → → 1.0240 → →

17、$ 5,120,000↑ ↓↑ ↓↑ ↓↑ ↓↑ ↓Spot (¥/$) ------------- 180 days -------------- Forward-180 (¥/$)118.60 117.80↑ ↓↑ ↓↑ 603,136,000593,000,000.00 → → 1.0170 → → 603,081,000Japanese yen 55,0003.400%START Japanese yen

18、interest rate (180 days) ENDAkira Numata generates a CIA profit by investing in the higher interest rate currency, the dollar, and simultaneously selling the dollar proceeds forward into yen at a forward premium which do