Trade Deficit Effects on Exchange Rates

CHAPTER 4

10. (2 Points) Trade Deficit Effects on Exchange Rates. Every month, the U.S. trade deficit figures are announced. Foreign exchange traders often react to this announcement and even attempt to forecast the figures before they are announced.

a. Why do you think the trade deficit announcement sometimes has such an impact on foreign exchange trading?

ANSWER:

b. In some periods, foreign exchange traders do not respond to a trade deficit announcement, even when the announced deficit is very large. Offer an explanation for such a lack of response.

21. (3 Points) Speculation. Diamond Bank expects that the Singapore dollar will depreciate against the dollar from its spot rate of $.43 to $.42 in 60 days. The following interbank lending and borrowing rates exist:

Lending Rate Borrowing Rate

U.S. dollar 7.0% 7.2%

Singapore dollar 22.0% 24.0%

Diamond Bank considers borrowing 10 million Singapore dollars in the interbank market and investing the funds in dollars for 60 days. Estimate the profits (or losses) that could be earned from this strategy. Should Diamond Bank pursue this strategy?

CHAPTER 5

10. (2 Points) Speculating with Currency Call Options. Randy Rudecki purchased a call option on British pounds for $.02 per unit. The strike price was $1.45 and the spot rate at the time the option was exercised was $1.46. Assume there are 31,250 units in a British pound option. What was Randy's net profit on this option?

11. (2 Points) Speculating with Currency Put Options. Alice Duever purchased a put option on British pounds for $.04 per unit. The strike price was $1.80 and the spot rate at the time the pound option was exercised was $1.59. Assume there are 31,250 units in a British pound option. What was Alice's net profit on the option?

17. (3 Points) Price Movements of Currency Futures. Assume that on November 1, the spot rate of the British pound was $1.58 and the price on a December futures contract was $1.59. Assume that the pound depreciated during November so that by November 30 it was worth $1.51.

a. What do you think happened to the futures price over the month of November? Why?

b. If you had known that this would occur, would you have purchased or sold a December futures contract in pounds on November 1? Explain

25. (3 Points) Estimating Profits from Currency Futures and Options. One year ago, you sold a put option on 100,000 euros with an expiration date of one year. You received a premium on the put option of $.04 per unit. The exercise price was $1.22. Assume that one year ago, the spot rate of the euro was $1.20, the one-year forward rate exhibited a discount of 2%, and the one-year futures price