Ec 7100 -Tansey
July 17, 2016
ASSIGNMENT 1 (Due Fri, March 3, 2006)
LEARNING OBJECTIVE: This assignment will:

Give you practice using exchange rates

Apply the Law of One Price in arbitrage

Introduce you to EXCEL and how to enter data in a spreadsheet.

Give practice in using the media to evaluate globalization
Retrieve the file “WorksheetAssn2” from the course “ExecFell” at the website,
cte.rockhurst.edu/tanseym. Click on it and rename and save the worksheet
“Exi06SlastnameAssn2” to send to me by e-mail when you have completed the
assignment.
A. Go to the “Xrate” worksheet tab and click it. In cell A1 enter your class number.
B. In cell B1 enter your last name
C. In cell C1 enter your first name.
Once you have done this on the first worksheet it will automatically change the following
worksheets- avoid touching the first row in the following worksheets. Do any three of the
following four “Parts” and for those three decide what weights you will give each question.
Put the weights in C1 of each worksheet. Also put the weights in your email message to me
in your EXCEL worksheet that you have entitled “Exi06SlastnameAssn2”
Part I. The “Xrate” worksheet. There are six sets of data. Assume that you start with
$1000. You only have time to exchange that thousand dollars in the foreign exchange
markets three times. For example you can exchange it in New York for another currency,
then convert that currency into another currency, and then convert that currency back into
dollars. Find the three trades that would make the most money for you in each of the six
situations represented on the exchange rate page.
1.
Enter your answer in the cell in column F that is immediately to the right of the cell
entitled “Value after 3 exchanges=”. Make sure you have gotten the maximum value in
each case for your initial $1000. You are only required (if you do this part) to do the first
three, but you are addicted to the problem of sorting through the law of one price and
have any pretensions of being a capable arbitrageur, you will want to test your mettle
against the last three data sets (extra credit of course).
2.
In each market, based on what you currency exchange you have made, decide
what has happened to either the supply or demand for each of the currencies in that
market. (HINT: if the supply of pounds has shifted right, then the demand for dollars in
that exchange market will have shifted left). In each blank you will have an answer and it
will either be “S” for supply of the currency of “D” for demand for the currency. Place
your answers on the worksheet in column M.
Part II. The “Barter” worksheet. Exchanging currencies is like bartering for
commodities. In the barter worksheet follow exactly the same rules as you did for the
currencies, but this time you start with 10 pounds of tea. After doing this assignment you
are officially qualified to trade in prehistoric times before there were former currencies.
Good luck. (Don’t forget to determine whether it is supply or demand that is changing in
each market)
Part III. The “ForeignInvest” worksheet. The basic formula for how much you make
by investing $1000 abroad is:
$ after 1 year of investment= initial $1000 x Exchange rate (Foreign currency/$)
x (1 + interest rate on foreign investment)
x Forward Exchange rate ($/ foreign currency)
A.
You have four opportunities for investment;
1) keeping the money in the U.S. which means you don’t have to worry about the
exchange rate, but only the U.S. interest rate)
2) Investing in the EFTA countries with euros
In row 9 under each country show how much you end up with after your initial
investment. In row 10 indicate what will happen to the supply of each of the currencies as
a result of your calculations (“L” indicates a shift left for the currency and “R” indicates
shift right for the currency)
B. (Strictly voluntary). If you want to see whether it matters what country you are
coming from about your decision to invest (extra credit of course), try the
following.
1)
Start with 1000 euros instead of dollars, placing your answers in row
11 and indication of direction of currency supply shift in row 12.
2)
Start with 1000 yen instead of dollars placing your answers in row 13
and indication of direction of currency supply shift in row 14.
3)
Start with 1000 rupees instead of dollars placing your answers in row
15 and indication of direction of currency supply shift in row 16.
C. Why might it be that, in spite of the incentive to make more money by foreign
investment, that firms would only consider domestic investments. Answer in a
textbox beneath the above answers.
Part IV. The “Media” Worksheet. Find a media example reported in the last half year
about a globalizing activity that an American company has initiated. Place the article (or
excerpts) in the worksheet entitled “Media” with references to the source and date from
which you picked the article up. Then Based on the article alone see what assessment you
can make of the globalizing activity (and intersperse your answers within the following
textbox):
1) The reasons that the company has undertaken the global activity (not more than a
paragraph).
2) The considerations and analysis they have done (not more than a paragraph)
3) Adequacy of the information about whether the company has done due diligence in
making the decision to take this globalizing action (not more than a short paragraph)
4) The adequacy of the article in helping us to evaluate if the globalizing activity will
likely add to the stock value and viability of the company. (This is the one to haul off and
hit, but don’t spend more than an hour on this essay if you do this part).