Chapter 5
Problem 5.1 Brazilian real
What was the percentage change in its value?
Assumptions
Spot rate, Monday January 11, 1999, R$/$
Spot rate, Friday January 15, 1999, R$/$
Calculation percentage appreciation or depreciation
Percentage change in the real versus the dollar
Because the real fell in value:
Values
1.21
1.43
–15.38%
Depreciation
Problem 5.2 Turkish lira
What was the exchange rate and percent devaluations?
Assumptions
Spot rate, February 20, 2001 (TL/$)
Turkish government announces a devaluation of:
Spot rate, February 24, 2001 (TL/$)
Values
68,000
–20.00%
100,000
a. What was the exchange rate after devaluation?
Spot rate after devaluation
Check calculation: percentage change in values
85,000
–20.0%
b. What was percentage change after falling to TL100,000/$?
Percentage change from initial value
Percentage change from “devalued” value
–32.0%
–15.0%
Problem 5.3 Mexican peso
What was the percentage devaluation?
Assumptions
Spot rate, December 20, 1994 (Ps/$)
Spot rate, December 21, 1994 (Ps/$)
Calculation percentage of devaluation:
Percentage change in the peso versus the dollar
Values
3.30
5.50
–40.00%
Problem 5.4 Russian ruble
What was the percentage devaluation?
Assumptions
Spot rate, August 7, 1998 (Rub/$)
Spot rate, September 10, 1998 (Rub/$)
Calculation of percentage change:
Percentage change in the ruble versus the dollar
Values
6.25
20.00
–68.75%
Problem 5.5 Thai baht
What was the percentage devaluation?
Assumptions
Opening spot rate, July 2, 1997 (Bt/$)
Closing spot rate, July 2, 1997 (Bt/$)
Calculation of percentage change:
Percentage change in the baht versus the dollar
Values
25.00
29.00
–13.79%
Problem 5.6 Ecuadoran sucre
What was the percentage change in its value?
Assumptions
Initial spot rate, 1999 (Sucre/$)
Ending spot rate, 1999 (Sucre/$)
Calculation of percentage change:
Percentage change in the sucre versus the dollar
Values
5,000
25,000
–80.00%
Problem 5.7 Forecating the Argentine peso
What will be the peso’s future value in the coming weeks?
Date
February 1st (Ps/$)
February 28th (Ps/$)
Percent change
“Eye-balled”
Values
2.00
2.20
–9.09%
If peso continued to fall at same rate for 1 month:
March 1, 2002 (Ps/$)
Percent change
March 30, 2002 (Ps/$)
2.20
–9.09%
2.42
The period immediately following the peso’s devaluation was highly volatile and a period of transition. Most forecasters would view the February period
as a period in which the new exchange rate is beginning to “stabilize” in its trading.
Problems 5.8–5.10 Forecasting the Pan-Pacific Pyramid: Australia, Japan & The United States
Country
Australia
Japan
United States
Country
Australia
Japan
United States
Country
Australia
Japan
United States
Country
Australia
Japan
United States
Gross Domestic Product
Industrial
Retail
Unemployment
Forecast
Forecast
Production
Sales
Rate
Recent Qtr
2003
2004e
2005e
Recent Qtr
Recent Qtr
Recent Qtr
0.9%
2.8%
3.8%
3.1%
–0.9%
7.7%
5.5%
6.1%
2.3%
4.1%
2.1%
8.7%
-0.5%
4.7%
4.4%
3.2%
4.7%
3.6%
6.3%
8.5%
5.6%
Consumer Prices
Producer Prices
Wages & Earnings
Forecast
Year Ago
2003
2004e
Latest
Year Ago
Latest
Year Ago
3.4%
2.7%
2.3%
–1.1%
3.0%
5.1%
4.4%
–0.1%
–0.3%
–0.1%
1.1%
–1.1%
0.7%
1.8%
2.1%
2.3%
2.3%
4.9%
2.4%
2.2%
3.0%
Money
Interest Rates (percent per annum)
Supply
3-month money market
2-year
10-year Govt Bonds
Corporate
Growth
Latest
Year Ago
Govt Bonds
Latest
Year Ago
Bonds
11.0%
5.48%
4.62%
5.18%
5.90%
4.73%
6.66%
2.0%
0.02%
0.01%
0.20%
1.87%
0.63%
1.93%
5.5%
1.40%
0.88%
2.74%
4.70%
3.35%
6.11%
Trade Balance
Current Account
Trade-Weighted Exchange
Currency
Last 12 mos
Last 12 mos
Actual 2003
Forecast 04
Rate (1990  100)
per Pound
(billion $)
(billion $)
(% of GDP)
(% of GDP)
June 23
Year Ago
June 23
–16.8
–$33.0
–6.2%
–5.2%
81.6
83.5
2.65
121.4
$157.2
3.0%
3.3%
136.1
128.5
198
–568.9
–$537.3
–5.0%
–5.1%
97.5
101.9
1.82
8. Current spot rates. What are the current spot exchange rates for the following cross rates?
a. Japanese yen/US dollar exchange rate
 (yen/pound spot)/(US$/pound spot)
108.79
b. Japanese yen/Australian dollar exchange rate
 (yen/pound spot)/(A$/pound spot)
74.72
c. Australian dollar/US dollar exchange rate
 (A$/pound spot)/(US$/pound spot)
9. Purchasing power parity forecasts. Assuming purchasing power parity, and that the forecast of consumer price
increases for the coming year are correct, forecast the:
a. Japanese yen/US dollar in 1 year
 Spot (Y/US$)  (1  Y-inflation)/(1  US$-inflation)
b. Japanese yen/Australian dollar in 1
 Spot (Y/A$)  (1  Y-inflation)/(1  A$-inflation)
c. Australian dollar/US dollar in 1 year
 Spot (A$/US$)  (1  A$-inflation)/(1  US$ inflation)
10. International Fisher forecasts. Asssuming International Fisher applies to the coming year, forecast the
following future spot exchange rates using the 2-year government bond interest rates:
a. Japanese yen/US dollar in 1 year
 Spot (Y/US$)  (1  i-2year-Yen)/(1  i-2year-US$)
b. Japanese yen/Australian dollar in 1 year
 Spot (Y/A$)  (1  i-2year-Yen)/(1  i-2year-A$)
c. Australian dollar/US dollar in 1 year
 Spot (A$/US$)  (1  i-2year-A$)/(1  i-2year-US$)
1.4560
106.24
72.96
1.4560
106.10
71.18
1.4906
Problem 5.11–5.13 Forecasting the Pan-Pacific Pyramid: Australia, Japan & The United States
Country
Australia
Japan
United States
Recent Qtr
0.9%
6.1%
4.4%
Country
Australia
Japan
United States
Year Ago
3.4%
–0.1%
2.1%
Money
Supply
Growth
11.0%
2.0%
5.5%
Trade Balance
Country
Australia
Japan
United States
Country
Australia
Japan
United States
Last 12 mos
(billion $)
–16.8
121.4
–568.9
Gross Domestic Product
Forecast
2003
2004e
2.8%
3.8%
2.3%
4.1%
3.2%
4.7%
Consumer Prices
Forecast
2003
2004e
2.7%
2.3%
–0.3%
–0.1%
2.3%
2.3%
3-month money market
Latest
Year Ago
5.48%
4.62%
0.02%
0.01%
1.40%
0.88%
Curent Account
Last 12
mos
Actual 2003
(billion $)
(% of GDP)
–$33.0
–6.2%
$157.2
3.0%
–$537.3
–5.0%
Industrial
Forecast
Production
2005e
Recent Qtr
3.1%
–0.9%
2.1%
8.7%
3.6%
6.3%
Producer Prices
Retail
Unemployment
Sales
Rate
Recent Qtr
Recent Qtr
7.7%
5.5%
–0.5%
4.7%
8.5%
5.6%
Wages & Earnings
Latest
Year Ago
Latest
–1.1%
3.0%
5.1%
1.1%
–1.1%
0.7%
4.9%
2.4%
2.2%
Interest Rates (percent per annum)
2-year
10-year Govt Bonds
Govt Bonds
Latest
Year Ago
5.18%
5.90%
4.73%
0.20%
1.87%
0.63%
2.74%
4.70%
3.35%
Trade-Weighted Exchange
Corporate
Bonds
6.66%
1.93%
6.11%
Currency
Rate (1990  100)
June 23
Year Ago
81.6
83.5
136.1
128.5
97.5
101.9
per Pound
June 23
2.65
198
1.82
Forecast 04
(% of GDP)
–5.2%
3.3%
–5.1%
Year Ago
4.4%
1.8%
3.0%
11. Implied real interest rates. If the nominal interest rate is the 2-year government bond rate, and the consumer
price forecast is expected inflation, calculate the following real interest rates:
a. Australian dollar real rate forecast for 2003:
 (1  nominal)/(1  2yr – consumer price change forecast) – 1
2.82%
b. Japanese yen real rate forecast for 2003:
 (1  nominal)/(1  2yr – consumer price change forecast) – 1
0.30%
c. US dollar real rate forecast for 2003:
 (1  nominal)/(1  2yr – consumer price change forecast) – 1
0.43%
Note that none of the real interest rates calculated is larger than 1.8%. In the case of Japan, the real interest rate calculated
is only as large as it is because of the forecast deflation in the price level (negative change in consumer prices). In the case
of the United States, the real rate calculated is actually negative as a result of unusually low nominal interest rates while
consumer prices are still seen to be rising over 2% per annum.
12. Forecasting with real interest rates. Using the real interest rates calculated in problem 11, forecast the
following future spot exchange rates using real interest rate differentials:
a. Japanese yen/US dollar exchange rate in 1 year
 Spot (Y/US$)  (1  Y-real)/(1  US$-real)
b. Japanese yen/Australian dollar exchange rate in 1 year
 Spot (Y/A$)  (1  Y-real)/(1  A$-real)
c. Australian dollar/US dollar exchange rate in 1 year
 Spot (A$/US$)  (1  A$-real)/(1  US$-real)
108.65
72.89
1.4906
13. Forward rates as forecasts. Calculate the 90-day forward rate on the following currency pairs using the
current spot rate and the latest 3-month money market interest rates:
a. Japanese yen/US dollar 90-day forward rate
 Spot (Y/US$)  (1  i-3mo-Yen  90/360)/(1  i-3mo-US$  90/360)
108.42
 Spot (Y/A$)  (1  i-3mo-Yen  90/360)/(1  i-3mo-A$  90/360)
 Spot (A$/US$)  (1  i-3mo-A$  90/360)/(1  i-3mo-US$  90/360)
73.71
1.4708
b. Japanese yen/Australian dollar 90-day forward rate
c. Australian dollar/US dollar 90-day forward rate
Problems 5.14–5.15 Forecasting the Pan-Pacific Pyramid: Australia, Japan & The United States
Country
Australia
Japan
United States
Country
Australia
Japan
United States
Country
Australia
Japan
United States
Country
Australia
Japan
United States
Gross Domestic Product
Industrial
Retail
Unemployment
Forecast
Forecast
Production
Sales
Rate
Recent Qtr
2003
2004e
2005e
Recent Qtr
Recent Qtr
Recent Qtr
0.9%
2.8%
3.8%
3.1%
–0.9%
7.7%
5.5%
6.1%
2.3%
4.1%
2.1%
8.7%
–0.5%
4.7%
4.4%
3.2%
4.7%
3.6%
6.3%
8.5%
5.6%
Consumer Prices
Producer Prices
Wages & Earnings
Forecast
Year Ago
2003
2004e
Latest
Year Ago
Latest
Year Ago
3.4%
2.7%
2.3%
–1.1%
3.0%
5.1%
4.4%
–0.1%
–0.3%
–0.1%
1.1%
–1.1%
0.7%
1.8%
2.1%
2.3%
2.3%
4.9%
2.4%
2.2%
3.0%
Money
Interest Rates (percent per annum)
Supply
3-month money market
2-year
10-year Govt Bonds
Corporate
Growth
Latest
Year Ago
Govt Bonds
Latest
Year Ago
Bonds
11.0%
5.48%
4.62%
5.18%
5.90%
4.73%
6.66%
2.0%
0.02%
0.01%
0.20%
1.87%
0.63%
1.93%
5.5%
1.40%
0.88%
2.74%
4.70%
3.35%
6.11%
Trade Balance
Current Account
Trade-Weighted Exchange
Currency
Last 12 mos
Last 12 mos
Actual 2003
Forecast 04
Rate (1990  100)
per Pound
(billion $)
(billion $)
(% of GDP)
(% of GDP)
June 23
Year Ago
June 23
–16.8
–$33.0
–6.2%
–5.2%
81.6
83.5
2.65
121.4
$157.2
3.0%
3.3%
136.1
128.5
198
–568.9
–$537.3
–5.0%
–5.1%
97.5
101.9
1.82
14. Real economic activity and misery. Calculate the country’s Misery Index (unemployment  inflation) and then
use it like interest differentials to forecast the future spot exchange rate, one year into the future.
Australia’s Misery Index
Forecast spot  Spot  ( 1  Misery-1)/( 1  Misery-2)
7.80%
Japan’s Misery Index
4.60%
United States’s Misery Index
7.90%
Starting
Spot Rate
a. Japanese yen/US dollar exchange rate in 1 year
108.79
b. Japanese yen/Australian dollar exchange rate in 1 year
74.72
c. Australian dollar/US dollar exchange rate in 1 year
1.4560
15. Balance of payments approach. Using the trade and current account information, forecast the direction of the
spot exchange rates for the coming year.
a. Japanese yen/US dollar exchange rate in 1 year
Japan is running a trade & current account surplus
US is running a trade & current account deficit
Dollar should weaken against the Japanese yen.
b. Japanese yen/Australian dollar exchange rate in 1 year
Japan is running a trade & current account surplus
Australia is running a trade & current account deficit
Australian dollar should weaken against the yen.
c. Australian dollar/US dollar exchange rate in 1 year
Australia is running a trade & current account deficit
US is running a trade & current account deficit
Indeterminate.
Forecast
Spot Rate
105.46
72.50
1.45
Problem 5.16–5.17 Forecasting the Pan-Pacific Pyramid: Australia, Japan & The United States
© 2004 by Prof. Werner Antweiler, University of British Columbia, Vancouver BC, Canada. Time period shown in diagrams: 1/Jan/1999–7/Sep/2004
16. Current accounts and spot rates. Are the current account forecasts from the previous question consistent
with the exchange rate trends shown above?
The Japanese yen appreciated in value against the US dollar over most of 2002 and 2003, stabilizing in 2004. This is consistent with the trade and current account balances
being run by the two countries.
The Australian dollar consistently strengthened against the US dollar over 2002–2003 period. The US dollar recovered some of its lost value in 2004. Although Australia and
the United States have similar inflation rate fundamentals, the Australian economy has grown at a more rapid rate in recent years.
17. Exchange rate trends and bounds. Use the graphs to determine trends, mean values, and upper and lower
bounds to spot exchange rate movements.
Upper
Lower
Trend
Mean
Bound
Bound
Yen/US$
US$ down
110–115
135.00
102.50
A$/US$
US$ down
1.50–1.60
2.00
1.3