国际贸易学
1 Essay Questions
1. In the year 2000, Americans flocked to Paris. What economic forces made French goods appear so cheap to residents of the United States?
Answer: One major factor was a sharp fall in the dollar price of France’s currency.
2. Who are the major participants in the foreign exchange market?
Answer: (1) Commercial banks
(2) Corporations
(3) Nonbank financial institutions
(4) Central banks
3. Based on the case study, “A Tale of Two Dollars,” explain why errors in the currency market can be more costly to the Toronto Blue Jays baseball team than errors in the field.
Answer: See page 329. The Toronto team has most of its revenue paid in Canadian dollars, but most of its expenses are players’ salaries paid in U.S. dollars. Since the Canadian dollar has depreciated substantially, it causes big losses for the team by raising its expenses relative to its receipts. To protect itself from the vagaries of the exchange rate, the team tries to predict its need for U.S. dollars ahead of time so that it can sell Canadian dollars and purchase the American currency in advance to lock in the exchange rate. Errors in the currency market can thus be more costly to the team than on the field.
4. Explain what is a “vehicle currency.” Why is the U.S. dollar considered a vehicle currency?
Answer: A vehicle currency is one that is widely used to denominate international contracts made by parties who do not reside in the country that issues the vehicle currency. Since in 2004, nearly ninety percent of foreign exchange transactions involve exchanges of foreign currencies for U.S. dollars; therefore, it is considered a vehicle currency.
5. What are the factors affecting the demand for foreign currency?
Answer: Three factors affect the demand for foreign currency. They are expected return, risk and liquidity.
6. What is the interest parity condition?
Answer: The condition that the expected returns on deposits of any two currencies are equal when measured in the same currency is called the interest parity condition. It implies that potential holders of foreign currency deposits view them as equally desirable assets, i.e. risk is assumed away.
In notational forms:
R$= RE+ (Ee$/E – E$/E)/E$/E
7. Discusses the effects of a rise in the dollar interest rate on the exchanger rate.
Answer: For a given euro interest rate and constant expected exchange rate, a rise in the interest rate offered by dollar deposits causes the dollar to appreciate.
8. Discusses the effects of a rise in the interest rate paid by euro deposits on the exchanger rate.
Answer: For a given U.S. interest rate and a given expectation with regards to the future exchange rate, a rise in the interest rate paid by euro deposits causes the dollar to depreciate.
9. Explain the purpose of the following figure. Show the effects of German unification on Germany’s interest rate.
Answer: The main purpose is to show that different interest rates exist for different assets since foreign currencies are different assets. From 1990 to 1995, the DM interest rate is higher than that of the United States. Excluding this period, the dollar rates are higher reflecting higher inflation in the United States and depreciating of the dollar versus the German currency.
10. Explain the purpose of the following figure.
Answer: To show that spot and forward exchange rates are in general close to each other.
11. Explain the purpose of the following figure in the context of the interest rates on the dollar and the Japanese Yen between 1980 and 2004. (Figure 13-2 on page 337g)
Answer: Since the dollar and the Yen interest rates are not measured in comparable terms, they can move quite differently over time. Except for a period from 1990 to 1993 when the Yen interest rate was higher than the dollar, dollar interest rates have been higher than the Yen, indicating depreciation of the dollar against the Yen.
12. Explain why depreciation in a country’s currency today lowers the expected domestic currency return on foreign currency deposits.
Answer: We have assumed that expected future currency rates and interest rates do not change. A depreciation today means that the dollar now needs to depreciate by a smaller amount to reach any given expected future level. If the expected future dollar/euro exchange rate does not change when the dollar depreciates today, the dollar’s expected future depreciation against the euro falls. Because interest rates are unchanged, today’s dollar depreciation makes euro deposits less attractive compared with dollar deposits. The future dollar payoff of a euro is the same, but the deposit’s current dollar cost increases.
13. What can you learn from the following figure? (Refers updated figure 13-1 with new data on pages 333a–333f).
Answer: The graph shows the trend of the dollar/pound spot and forward exchange rates between 1981 and 2004. We can see that spot and forward rates tend to move in a highly correlated fashion.
14. Explain why the interest parity condition must hold if the foreign exchange market is in equilibrium.
Answer: The foreign exchange market is in equilibrium when deposits of all currencies offer the same expected rate of return. Potential holders of foreign currency deposits view them all as equally desirable assets. If expected rate of return on any currency deposit is higher or lower than the other, there will exist an excess supply or demand for that currency because one will yield a higher return than the other.
15. Explain risk and liquidity of assets.
Answer: Risk is the variability an asset contributes to a savers’ wealth. An asset’s real return can be unpredictable and savers dislike this uncertainty if the return fluctuates widely. Liquidity refers to the ease with which an asset can be sold or exchanged for goods. Cash is the most liquid of assets because it is always acceptable at face value as payment for goods or other assets. Thus, savers consider an asset’s liquidity and its expected return and risk in deciding how much of it to hold.
2 Quantitative/Graphing Problems
1. Compute how many dollars would it cost to buy an Edinburgh Woolen Mill sweater costing
50 British pounds for the following exchange rates?
Exchange Rate
Number of Dollars per
| One British Pound | Price of a Sweaterin British Pounds | Price in Dollars |
| 1 | 50 | |
| 1.1 | 50 | |
| 1.2 | 50 | |
| 1.25 | 50 | |
| 1.3 | 50 | |
| 1.4 | 50 | |
| 1.5 | 50 | |
| 1.6 | 50 | |
| 1.7 | 50 | |
| 1.75 | 50 | |
| 1.8 | 50 | |
| 1.9 | 50 | |
| 2 | 50 |
Exchange Rate
Number of Dollars per
| One British Pound | Price of a Sweaterin British Pounds | Price in Dollars |
| 1 | 50 | $50.00 |
| 1.1 | 50 | $55.00 |
| 1.2 | 50 | $60.00 |
| 1.25 | 50 | $62.50 |
| 1.3 | 50 | $65.00 |
| 1.4 | 50 | $70.00 |
| 1.5 | 50 | $75.00 |
| 1.6 | 50 | $80.00 |
| 1.7 | 50 | $85.00 |
| 1.75 | 50 | $87.50 |
| 1.8 | 50 | $90.00 |
| 1.9 | 50 | $95.00 |
| 2 | 50 | $100.00 |
Exchange Rate
Number of Dollars per
| One British Pound | Price of a Pair ofAmerican Designer Jeans | Price in British Pounds |
| 1 | 45 | |
| 1.1 | 45 | |
| 1.2 | 45 | |
| 1.25 | 45 | |
| 1.3 | 45 | |
| 1.4 | 45 | |
| 1.5 | 45 | |
| 1.6 | 45 | |
| 1.7 | 45 | |
| 1.75 | 45 | |
| 1.8 | 45 | |
| 1.9 | 45 | |
| 2 | 45 |
Exchange Rate
Number of Dollars per
| One British Pound | Price of a Pair ofJeans | Price in British Pounds |
| 1 | 45 | 45 |
| 1.1 | 45 | 40.90909091 |
| 1.2 | 45 | 37.5 |
| 1.25 | 45 | 36 |
| 1.3 | 45 | 34.61538462 |
| 1.4 | 45 | 32.14285714 |
| 1.5 | 45 | 30 |
| 1.6 | 45 | 28.125 |
| 1.7 | 45 | 26.47058824 |
| 1.75 | 45 | 25.71428571 |
| 1.8 | 45 | 25 |
| 1.9 | 45 | 23.68421053 |
| 2 | 45 | 22.5 |
Price of a Pair of
American Designer
| Jeans | Price in British Pounds | Exchange Rateone British Pound |
| 45 | 10 | |
| 45 | 20 | |
| 45 | 30 | |
| 45 | 40 | |
| 45 | 50 | |
| 45 | 60 | |
| 45 | 70 | |
| 45 | 80 | |
| 45 | 90 | |
| 45 | 100 | |
| 45 | 110 | |
| 45 | 120 | |
| 45 | 130 | |
| 45 | 140 |
Price of a Pair of
American Designer
| Jeans | Price in British Pounds | Exchange Rateone British Pound |
| 45 | 10 | 4.5 |
| 45 | 20 | 2.25 |
| 45 | 30 | 1.5 |
| 45 | 40 | 1.125 |
| 45 | 50 | 0.9 |
| 45 | 60 | 0.75 |
| 45 | 70 | 0.642857143 |
| 45 | 80 | 0.5625 |
| 45 | 90 | 0.5 |
| 45 | 100 | 0.45 |
| 45 | 110 | 0.409090909 |
| 45 | 120 | 0.375 |
| 45 | 130 | 0.346153846 |
| 45 | 140 | 0.321428571 |
| Case | DollarRate, R$ | EuroRate, RE | ExpectedAgainst Euro | Rate ofDeposits |
| 1 | 0.1 | 0.06 | 0 | |
| 2 | 0.1 | 0.06 | 0.04 | |
| 3 | 0.1 | 0.06 | 0.08 | |
| 4 | 0.1 | 0.12 | –0.04 | |
| 5 | 0.1 | 0.18 | 0 | |
| 6 | 0.15 | 0.06 | 0 | |
| 7 | 0.15 | 0.06 | 0.04 | |
| 8 | 0.15 | 0.06 | 0.08 | |
| 9 | 0.15 | 0.12 | –0.04 | |
| 10 | 0.15 | 0.18 | 0 | |
| 11 | 0.2 | 0.06 | 0 | |
| 12 | 0.2 | 0.06 | 0.04 | |
| 13 | 0.2 | 0.06 | 0.08 | |
| 14 | 0.2 | 0.12 | –0.04 | |
| 15 | 0.2 | 0.18 | 0 |
| Case | DollarRate, R$ | EuroRate, RE | ExpectedAgainst Euro | Rate ofDeposits |
| 1 | 0.1 | 0.06 | 0 | 0.04 |
| 2 | 0.1 | 0.06 | 0.04 | 0 |
| 3 | 0.1 | 0.06 | 0.08 | –0.04 |
| 4 | 0.1 | 0.12 | –0.04 | 0.02 |
| 5 | 0.1 | 0.18 | 0 | –0.08 |
| 6 | 0.15 | 0.06 | 0 | 0.09 |
| 7 | 0.15 | 0.06 | 0.04 | 0.05 |
| 8 | 0.15 | 0.06 | 0.08 | 0.01 |
| 9 | 0.15 | 0.12 | –0.04 | 0.07 |
| 10 | 0.15 | 0.18 | 0 | –0.03 |
| 11 | 0.2 | 0.06 | 0 | 0.14 |
| 12 | 0.2 | 0.06 | 0.04 | 0.1 |
| 13 | 0.2 | 0.06 | 0.08 | 0.06 |
| 14 | 0.2 | 0.12 | –0.04 | 0.12 |
| 15 | 0.2 | 0.18 | 0 | 0.02 |
| Case | R$ | RE | ExpectedE | Rate ofDeposits | ExactFormula |
| 1 | 0.1 | 0.06 | 0 | 0.04 | |
| 2 | 0.1 | 0.06 | 0.04 | 0 | |
| 3 | 0.1 | 0.06 | 0.08 | –0.04 | |
| 4 | 0.1 | 0.12 | –0.04 | 0.02 | |
| 5 | 0.1 | 0.18 | 0 | –0.08 | |
| 6 | 0.15 | 0.06 | 0 | 0.09 | |
| 7 | 0.15 | 0.06 | 0.04 | 0.05 | |
| 8 | 0.15 | 0.06 | 0.08 | 0.01 | |
| 9 | 0.15 | 0.12 | –0.04 | 0.07 | |
| 10 | 0.15 | 0.18 | 0 | –0.03 | |
| 11 | 0.2 | 0.06 | 0 | 0.14 | |
| 12 | 0.2 | 0.06 | 0.04 | 0.1 | |
| 13 | 0.2 | 0.06 | 0.08 | 0.06 | |
| 14 | 0.2 | 0.12 | –0.04 | 0.12 | |
| 15 | 0.2 | 0.18 | 0 | 0.02 |
| Case | R$ | RE | ExpectedE | Rate ofDeposits | ExactFormula |
| 1 | 0.1 | 0.06 | 0 | 0.04 | 0.04 |
| 2 | 0.1 | 0.06 | 0.04 | 0 | –0.0024 |
| 3 | 0.1 | 0.06 | 0.08 | –0.04 | –0.0448 |
| 4 | 0.1 | 0.12 | –0.04 | 0.02 | 0.0248 |
| 5 | 0.1 | 0.18 | 0 | –0.08 | –0.08 |
| 6 | 0.15 | 0.06 | 0 | 0.09 | 0.09 |
| 7 | 0.15 | 0.06 | –0.04 | 0.05 | 0.0476 |
| 8 | 0.15 | 0.06 | 0.08 | 0.01 | 0.0052 |
| 9 | 0.15 | 0.12 | –0.04 | 0.07 | 0.0748 |
| 10 | 0.15 | 0.18 | 0 | –0.03 | –0.03 |
| 11 | 0.2 | 0.06 | 0 | 0.14 | 0.14 |
| 12 | 0.2 | 0.06 | 0.04 | 0.1 | 0.0976 |
| 13 | 0.2 | 0.06 | 0.08 | 0.06 | 0.0552 |
| 14 | 0.2 | 0.12 | –0.04 | 0.12 | 0.1248 |
| 15 | 0.2 | 0.18 | 0 | 0.02 | 0.02 |
15 cases:
| Case | RE | ExpectedE | R$ |
| 1 | 0.06 | 0 | |
| 2 | 0.06 | 0.04 | |
| 3 | 0.06 | 0.08 | |
| 4 | 0.12 | –0.04 | |
| 5 | 0.18 | 0 | |
| 6 | 0.06 | 0 | |
| 7 | 0.06 | 0.04 | |
| 8 | 0.06 | 0.08 | |
| 9 | 0.12 | –0.04 | |
| 10 | 0.18 | 0 | |
| 11 | 0.06 | 0 | |
| 12 | 0.06 | 0.04 | |
| 13 | 0.06 | 0.08 | |
| 14 | 0.12 | –0.04 | |
| 15 | 0.18 | 0 |
| Case | RE | ExpectedE | R$ |
| 1 | 0.06 | 0 | 0.06 |
| 2 | 0.06 | 0.04 | 0.1 |
| 3 | 0.06 | 0.08 | 0.14 |
| 4 | 0.12 | –0.04 | 0.08 |
| 5 | 0.18 | 0 | 0.18 |
| 6 | 0.06 | 0 | 0.06 |
| 7 | 0.06 | 0.04 | 0.1 |
| 8 | 0.06 | 0.08 | 0.14 |
| 9 | 0.12 | –0.04 | 0.08 |
| 10 | 0.18 | 0 | 0.18 |
| 11 | 0.06 | 0 | 0.06 |
| 12 | 0.06 | 0.04 | 0.1 |
| 13 | 0.06 | 0.08 | 0.14 |
| 14 | 0.12 | –0.04 | 0.08 |
| 15 | 0.18 | 0 | 0.18 |
15 cases:
| Case | RE | ExpectedE | R$ |
| 1 | 0 | 0.06 | |
| 2 | 0.04 | 0.11 | |
| 3 | 0.08 | 0.16 | |
| 4 | –0.04 | 0.05 | |
| 5 | 0 | 0.1 | |
| 6 | 0 | 0.11 | |
| 7 | 0.04 | 0.16 | |
| 8 | 0.08 | 0.21 | |
| 9 | –0.04 | 0.1 | |
| 10 | 0 | 0.15 | |
| 11 | 0 | 0.16 | |
| 12 | 0.04 | 0.21 | |
| 13 | 0.08 | 0.26 | |
| 14 | –0.04 | 0.15 | |
| 15 | 0 | 0.2 |
| Case | RE | ExpectedE | R$ |
| 1 | 0.06 | 0 | 0.06 |
| 2 | 0.07 | 0.04 | 0.11 |
| 3 | 0.08 | 0.08 | 0.16 |
| 4 | 0.09 | –0.04 | 0.05 |
| 5 | 0.1 | 0 | 0.1 |
| 6 | 0.11 | 0 | 0.11 |
| 7 | 0.12 | 0.04 | 0.16 |
| 8 | 0.13 | 0.08 | 0.21 |
| 9 | 0.14 | –0.04 | 0.1 |
| 10 | 0.15 | 0 | 0.15 |
| 11 | 0.16 | 0 | 0.16 |
| 12 | 0.17 | 0.04 | 0.21 |
| 13 | 0.18 | 0.08 | 0.26 |
| 14 | 0.19 | –0.04 | 0.15 |
| 15 | 0.2 | 0 | 0.2 |
| Case | Today’sRate | InterestDeposits | Expected(1.05 – E)/E | Expected DollarRe + (1.05 – E)/E |
| 1 | 1.07 | |||
| 2 | 1.06 | |||
| 3 | 1.05 | |||
| 4 | 1.04 | |||
| 5 | 1.03 | |||
| 6 | 1.02 | |||
| 7 | 1.01 | |||
| 8 | 1 | |||
| 9 | 0.99 | |||
| 10 | 0.98 |
| Case | Today’sRate | InterestDeposits | ExpectedEuro (1.05 – E)/E | Expected DollarRe + (1.05 – E)/E |
| 1 | 1.07 | 0.05 | –0.0186916 | 0.031308411 |
| 2 | 1.06 | 0.05 | –0.009434 | 0.040566038 |
| 3 | 1.05 | 0.05 | 0 | 0.05 |
| 4 | 1.04 | 0.05 | 0.0096154 | 0.059615385 |
| 5 | 1.03 | 0.05 | 0.0194175 | 0.069417476 |
| 6 | 1.02 | 0.05 | 0.0294118 | 0.079411765 |
| 7 | 1.01 | 0.05 | 0.039604 | 0.08960396 |
| 8 | 1 | 0.05 | 0.05 | 0.1 |
| 9 | 0.99 | 0.05 | 0.0606061 | 0.110606061 |
| 10 | 0.98 | 0.05 | 0.0714286 | 0.121428571 |
Answer:
10. Using the data from Question 8 and the plot in Question 9, show that if the interest rate in the
United States is 10 percent, the exchange rate will be 1, and if the interest rate in the United States
is 12 percent, the exchange rate will be 0.98 dollars per euro.
Answer: Points 1 and 2 in the figure below correspond to these two equilibrium points.
11. Assume the U.S. interest rate is 10 percent, and the interest rate on euro deposits is 5 percent. For the following exchange rates, find the forward exchange rates.
Today’s
Dollar/Euro
Exchange Rate
E
| $/E | Forward$/E |
| 1 | |
| 1.05 | |
| 1.1 | |
| 1.2 | |
| 1.3 |
ef7413da4a40a5520f33b13a1adc9c1a.png
Today’s
Dollar/Euro
Exchange Rate
E
| $/E | Forward$/E |
| 1 | 1.05 |
| 1.05 | 1.1025 |
| 1.1 | 1.155 |
| 1.2 | 1.26 |
| 1.3 | 1.365 |
Today’s Dollar/Euro
Exchange Rate
| 38d55fd4c76808481d1af0cca1db906e.png | Interest Rate on Euro€ | Expected Dollara5aeeeae5f98c8775af7ffe1e73bbc25.png | Expected Dollare51d2749c8f41e97e428cc9a36ce43bf.png |
| 1.10 | 0.03 | ||
| 1.08 | 0.03 | ||
| 1.06 | 0.03 | ||
| 1.04 | 0.03 | ||
| 1.02 | 0.03 |
Today’s Dollar/Euro
Exchange Rate
| 38d55fd4c76808481d1af0cca1db906e.png | Interest Rate on Euro€ | Expected Dollara5aeeeae5f98c8775af7ffe1e73bbc25.png | Expected Dollare51d2749c8f41e97e428cc9a36ce43bf.png |
| 1.10 | 0.03 | 0 | 0.03 |
| 1.08 | 0.03 | 0.018519 | 0.048519 |
| 1.06 | 0.03 | 0.037736 | 0.067736 |
| 1.04 | 0.03 | 0.057692 | 0.087692 |
| 1.02 | 0.03 | 0.078431 | 0.108431 |
Answer: A drop in the interest rate from R1$ to R2$ causes the dollar to depreciate from
69d5c2f4c54ed5274fd9a2a6d83cd02b.png (point 1) to d079fb23c95b55b4c39bf6f47575d9a7.png (point 2).
14. Show graphically a drop in the interest rate offered by dollar deposits, R$, and the effect on the exchange rate, cdfa037caf27693076c1933b0764fae9.png
Answer:
A drop in the interest rate paid by euro deposits causes the dollar to appreciate from 69d5c2f4c54ed5274fd9a2a6d83cd02b.png (point 1) to d079fb23c95b55b4c39bf6f47575d9a7.png(point 2). The expected future exchange rate also drops.
15. Determine for each, whether the interest parity condition holds or not, if ac190bfe31f4cfd47b6934ca230d6cf8.png
Interest Rate for
the Dollar
R
| $ | Interest Rate for€ | Exchange Rate38d55fd4c76808481d1af0cca1db906e.png |
| 0.04 | 0 | 1.037 |
| 0.07 | 0.02 | 0.99 |
| 0.08 | 0.08 | 0.948 |
| 0.09 | 0.04 | 1.047 |
| 0.2 | 0.1 | 1 |
| 0.1 | 0 | 0.99 |
| 0.12 | 0.04 | 0.948 |
Interest Rate
for the Dollar
R
| $ | Interest Rate€ | Expected Rate59a23e283a086d733ea84bfa01270fc7.png | Interest ParityCondition Holds? |
| 0.04 | 0 | 0.06 | No |
| 0.07 | 0.02 | 0.11 | No |
| 0.08 | 0.08 | 0.16 | Yes |
| 0.09 | 0.04 | 0.05 | Yes |
| 0.2 | 0.1 | 0.1 | Yes |
| 0.1 | 0 | 0.11 | No |
| 0.12 | 0.04 | 0.16 | Yes |
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