College Bowl
Final Round
Question #1
Suppose that Purchasing Power Parity holds. Annual inflation
in the US is currently 7% annually (from the latest CPI
numbers) while annualized inflation in Britain is 2%. If the
current exchange rate is $1.90 per pound, what will the
exchange rate be in 6 months?
$1.90 (1.025) = $1.9475
Question #2
Suppose that the annual interest rate in the US is 3%
while in Europe, a comparable asset pays 4%. The
current spot rate is $1.35 per Euro, and the one year
forward rate is $1.40. How could you make money off
this information and what would your annual return be?
By borrowing the US and lending in Europe, you earn 1%
(the interest differential), plus 3.7% (the pound
appreciation)
Question #3
US inflation is currently 7% annually while European
inflation is 5%. The dollar depreciates by 4% against the
Euro, what happens to the real exchange rate?
The real exchange rate depreciates by 4% + 5% - 7% = 2%
Question #4
All else equal, if US economic growth outpaces European
growth, what should happen to the value of the dollar?
It should appreciate relative to the Euro
Question #5
The US is running a $600B trade deficit:
1) All else equal, what should happen to the dollar?
2) Changes is the exchange rate should correct the
trade deficit unless this is true?
The trade deficit should cause the dollar to depreciate
(making US goods cheaper and foreign goods more
expensive). This will fix the deficit unless import/export
elasticities are low.
Question #6
Suppose that the price of services (a non-traded good) rises
in the US. All else equal, what should happen to the
nominal AND real exchange rate?
Nothing happens to the nominal exchange rate, the
dollar, however, appreciates in real terms (US
goods become more expensive relative to foreign
goods.
Question #7
What is a currency straddle and why is it useful?
A straddle combines a put option with a call
option. It protects the buyer from both
currency appreciations AND depreciations.
Question #8
You have a L100,000 payable that will come due in one
year. Currently the pound is trading at $1.80. Your point
estimate for the pound one year from now is a 5%
appreciation (5% depreciation of the dollar) with a standard
error of 1%. What is the 95% confidence for you expected
dollar costs?
A 5% depreciation implies a future exchange rate of
$1.80(1.05) = $1.89($100,000) = $189,000 two standard
deviations is 2% (+/- $3,780)
[$185,220, $192,780]
Question #9
If you had a payable denominated in Yen, how
would you hedge this in the option market?
You would buy a call option on Yen.
Question #10
How does economic exposure differ from transaction
exposure?
Transaction exposure deals with fixed cash flows while
economic exposure deals with variable cash flows
Question #11
Variable
Intercept
% Change e ($/E)
Regression Results
Coefficients Standard Error
t Stat
.05
1.5
.03
-3.35
.97
-3.45
Given this regression of $ cash flows and the exchange
rate, how could you hedge your risk in the futures market?
You are losing money when the Euro appreciates.
Therefore, you could offset this loss by taking a long
position in Euro.
Question #11
Some people would argue that you shouldn’t have to
hedge translation exposure. Why is this?
Translation exposure doesn’t involve actual cash flows.
Only the conversion of financial statements into the
company’s home currency.
Question #12
China is currently pegging to the dollar. As the dollar
continues to depreciate, what must the Peoples Bank of
China do and why is it a bad policy in the long run?
China must buy up dollars in the world markets. This
expands the Chinese money supply which will ultimately
lead to inflation.
Question #13
What is contagion and why does it occur?
Contagion describes the transmission of currency crises
across neighboring countries. It is due to
•Common policies/shocks
•Trade linkages
•Financial linkages
•Information Problems
Question #14
What are the costs/benefits of using an option hedge
rather than a forward hedge?
An option hedge allows the holder to benefit from
profitable exchange rate movements, but costs more up
front (the premium)
Question #15
If you knew that the Dollar/Euro exchange rate was going
to fluctuate between $1.35 and $1.45, what would be the
most efficient hedge?
An bullish spread (Buy a call option w/ a strike price of
$1.35 and sell a call with a strike price of $1.45. The
proceeds from the call sale should offset the purchase
price of the other call.
Lightning Round – Movie Quotes
“I'm the Dude so that's what you call me..ya know ah,
that or his Dudeness or duder or El Dudereno if you're
not into the whole brevity thing.”
The Big Lebowski (1998)
Lightning Round – Movie Quotes
I know what you're thinking. Did he fire six shots or
only five? …..you've got to ask yourself one question:
'Do I feel lucky?' Well, do ya punk?"
Dirty Harry (1971)
Lightning Round – Movie Quotes
"Greed, for lack of a better word, is good. Greed is
right. Greed works. Greed clarifies, cuts through, and
captures the essence of the evolutionary spirit. Greed,
in all of its forms."
Wall Street (1987)
Lightning Round – Movie Quotes
"I love the smell of napalm in the morning...smells
like...victory."
Apocalypse Now (1979)
Lightning Round – Movie Quotes
"Mrs. Robinson, you're trying to seduce me. Aren't
you?"
The Graduate (1967)
Lightning Round – Movie Quotes
- "Surely you can't be serious."
- "I am serious, and don't call me Shirley."
Airplane (1980)
Lightning Round – Movie Quotes
"People all say that I've had a bad break, but today today I consider myself the luckiest man on the face of
the Earth."
Pride of the Yankees (1943)
Lightning Round – Movie Quotes
"Only one thing counts in this life: Get them to sign on
the line which is dotted...A. Always. B. Be. C. Closing.
Always Be Closing."
Glengarry Glen Ross (1992)
Lightning Round – Movie Quotes
"My father made him an offer he couldn't refuse."
The Godfather (1972)
Lightning Round – Movie Quotes
"A census taker once tried to test me. I ate his liver with
some fava beans and a nice Chianti."
Silence of the Lambs (1991)
Lightning Round – Movie Quotes
"Of all the gin joints in all the towns in all the world,
she walks into mine."
Casablanca (1942)
Lightning Round – Movie Quotes
"Show me the money!"
Jerry Maguire (1996)
Lightning Round – Movie Quotes
"Mama says stupid is as stupid does."
Forest Gump (1994)
Lightning Round – Movie Quotes
"We all go a little mad sometimes... Haven't you?"
Psycho (1960)
Lightning Round – Movie Quotes
"Get your stinkin' paws off me, you damn dirty ape!"
Planet of the Apes (1968)
Lightning Round – Movie Quotes
"I'm sorry Dave, I'm afraid I can't do that."
2001: A Space Odyssey (1968)
Lightning Round – Movie Quotes
"I feel the need - the need for speed!"
Top Gun (1986)
Lightning Round – Movie Quotes
"Hey Stell - Lahhhhh!" "Hey, Stell - Lahhhh!"
A Streetcar Named Desire (1951)
Lightning Round – Movie Quotes
"Gentlemen. You can't fight in here. This is the War
Room!"
Dr. Strangelove, or: How I learned to Stop
Worrying and Love the Bomb (1964)
Lightning Round – Movie Quotes
"As God is my witness, I'll never be hungry again."
Gone With the Wind (1939)