College Bowl

1
College Bowl

• Round 2

2
Question 1

• Following WWII, the international financial
  system was defined by the Bretton Woods system of
  Fixed exchange rates.
• In what state is Bretton Woods located?
• In what year did the Bretton Woods system end and
  why?

3
Question 1

• The Bretton Woods agreement was signed in Bretton
  Woods, New Hampshire
• The Bretton Woods system ended in August, 1971
  when Nixon closed the gold window ending the
  ties between the dollar and gold.

4
Question 2

• Suppose the current we have the following
  exchange rates
• EUR/USD 1.35
• CHF/USD .85
• What is the CHF/EUR exchange rate?
• CHF/EUR .63 (EUR/CHF 1.59)

5
Question 3

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

eP
RER

.70 US Goods per Australian Good
P
1.43 Australian Goods per US Good
6
Question 4

• Suppose that Warren Buffet purchases a 10 year,
  E100,000 bond with a 5 annual coupon payment
  from the ECB. He pays E105,000 for it. The
  exchange rate is 1.30 per Euro and is not
  expected to change.
• How would this be recorded in the balance of
  payments this year? (Remember, the US BOP are
  recorded in s)
• How would this be recorded next year?

7
BOP (This Year)

• Current Account
• Exports
• Goods
• Services
• Imports
• Goods
• Services
• Net Factor Income
• Net Unilateral Transfers
• CA Balance 0

• Capital Financial Account
• Foreign acquisition of US assets
• US Treasuries
• Private Securities
• FDI
• Currency 136,500
• US acquisition of foreign assets
• FDI
• Portfolio Investment -136,500
• Official Reserve Assets
• Foreign acquisition of US ORA
• US acquisition of foreign ORA
• KFA Balance 0

8
BOP (This Year)

• Current Account
• Exports
• Goods
• Services
• Imports
• Goods
• Services
• Net Factor Income 6,500
• Net Unilateral Transfers
• CA Balance 6,500

• Capital Financial Account
• Foreign acquisition of US assets
• US Treasuries
• Private Securities
• FDI
• Currency
• US acquisition of foreign assets
• FDI
• Portfolio Investment -6,500
• Official Reserve Assets
• Foreign acquisition of US ORA
• US acquisition of foreign ORA
• KFA Balance -6,500

9
Question 5

• Suppose that the Oil counts for 30 of the US CPI
  and 60 of the Saudi Price index.
• If OPEC decides to raise the price of oil
  worldwide by 25 , what will happen to the
  nominal and real exchange rate between the US and
  Saudi Arabia?

10
Question 5

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

The following year we have the following.
11
Question 5

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

No Change in the Nominal Exchange Rate
The real exchange rate adjusts according to the
following.
A 7 Real Depreciation
12
Question 6

• Suppose we have the following trade data
• US Exports (to the rest of the World) 100M
• US Imports (from Europe) 150M
• Assume that we have no exports to Europe. The
  current exchange rate is 1.50 per Euro and the
  elasticity of import demand in the US is 2. What
  would the exchange rate need to be to eliminate
  the trade deficit?

13
Question 6

• We need to lower our expenditures by 33 (from
  150M to 100M).
• Each 1 depreciation of the dollar increases
  import prices by 1

Percentage Change in Expenditures
Percentage Change in Price
(1 Elasticity)

2
(-33)
We need the dollar to depreciate by 33 to
2.00/Euro!
14
Question 7

• Suppose that you were interested in taking a long
  position in 3 month Futures for GBP. Currently,
  the GBP is selling for 1.80, the 1 year TBill
  rate in the US is 3 while the British interest
  rate is 4. What price would you pay for the
  future?

i i Forward Premium/Discount
i i
Forward Premium/Discount -.25 (The interest
rates are on an annual basis)
4
F (1.80)(1 - .0025) 1.7955
I would accept F (1.80)(1 - .01) 1.782
15
Question 8

• Suppose you purchase a call option on C100,000
  Canadian dollars with a strike price of .75. On
  settlement day, the spot price of Canadian
  dollars is .80. What is your payout from the
  option?

Payout (.05)(100,000) 5,000
16
Question 9

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

Change in RER
Change in e
Inflation - Inflation


6
5
3
4
A 4 Nominal Depreciation
17
Question 10

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

Call Price
Strike Price
Put Price exchange rate

(1i)
1.35
.08
1.35/1.04
.03
18
Lightning Round

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

8 S. on a S.S
Signs on a Stop Sign
2 N. it takes to T.
Number it Takes to Tango
64 S. on a C.
Squares on a Checkerboard
1,000 W. that a P. is W.
Words that a Picture is Worth
3 B. M. (S. H. T. R.)
Blind Mice (See How They Run)
19
Lightning Round

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

12 S. of the Z.
Signs of the Zodiac
4 Q. in a G.
Quarts in a Gallon
100 B. of B. on the W.
Bottles of Beer on the Wall
12 D. of C.
Days of Christmas
88 P. K.
Piano Keys