INF MIDTERM Flashcards
Assume that the dollar is presently weak and is expected to strengthen over time. How will these
expectations affect the tendency of U.S. investors to invest in foreign securities?
Short-Term Hesitation:
Short-term investors may be particularly wary of investing in foreign securities, given the potential for currency fluctuations that could erode returns
Long-Term Strategy:
Long-term investors might be more willing to diversify their portfolios with foreign assets, viewing them as a hedge against domestic economic risks, despite short-term currency concerns
Focus on U.S. Economic Indicators:
Expectations of a strengthening dollar may also be linked to rising interest rates or improved economic indicators in the U.S. This could lead investors to favor U.S. investments over foreign ones.
If you have US and England, Us investors invevst in british securties, we expect the return to be high, but in the future if we expect the dollar to be stronger and better against pound, you will convert less money because amount you bought in present will not hold in the future
i - i* > (et+1 - et)/et
Explain how the appreciation of the Japanese yen against the U.S. dollar would affect the return to a
U.S. firm that borrowed Japanese yen and used the proceeds for a U.S. project.
Currency Conversion Impact:
If the firm borrowed yen, it will need to repay that loan in yen. When the yen appreciates, it means that each yen is worth more in terms of U.S. dollars. Consequently, the firm will need more dollars to convert into yen for repayment
In summary, the appreciation of the Japanese yen against the U.S. dollar increases the cost of repaying yen-denominated loans for a U.S. firm. This can negatively impact the firm’s overall returns on its U.S. project by reducing net profitability, increasing financial risk, and potentially squeezing profit margins.
Assume that exchange rate in future will remain the same, just look at interest rate differential i - i*
What is the Bid/Ask formula?
(ASK - BID) / ASK
Why do interest rates vary among countries?
interest rates vary among countries due to factors like monetary policy, inflation expectations, economic conditions, and credit risk.
Why are interest rates usually similar for those European countries that use the euro as their currency?
Within the eurozone, interest rates tend to be similar due to the ECB’s influence and integrated markets, but variations can still arise from differences in credit risk and fiscal policies among member states.
Demand and supply of gov. bonds should also affect interest rates
Offer a reason why the government interest rate of one country could be slightly higher than the government interest rate of another country, even though the euro is the
currency used in both countries.
Credit Risk Differentiation:
Even within the eurozone, differences in creditworthiness can lead to slight variations in interest rates. For instance, if investors perceive one country as riskier due to economic instability or high debt levels, they may demand a higher yield on government bonds from that country, leading to higher interest rates.
What happened in the credit crisis of 2008-2009?
Housing market crashed
Financial institutions bundled risky mortgages into mortgage-backed securities (MBS) and sold them to investors. This spread the risk but also obscured the true value of these assets.
Explain how the international integration of financial markets caused the credit crisis of 2008-2009 to spread across many countries.
As defaults increased and the value of MBS plummeted, major financial institutions began to fail or require government bailouts. This created a domino effect that impacted global markets.
Assume that the U.S. inflation rate becomes high relative to Canadian inflation. Other things being equal, how should this affect the U.S. demand for Canadian dollars, the supply of Canadian dollars for sale, and the equilibrium value of the Canadian dollar.
- Increased demand for Canadian dollars
- supply of Canadian dollars for sale remain same
- Appreciation of the Canadian dollar relative to the U.S. dollar.
Why do you think the trade deficit announcement sometimes has such an impact on foreign exchange trading?
the trade deficit is closely monitored by forex traders because of its potential effects on currency value, investor sentiment, and broader economic policy.
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.
If traders were already anticipating the deficit based on previous trends or economic data, the announcement may not come as a surprise. In such cases, the market may have already priced in the expected impact, leading to little reaction.
Tarheel Co. plans to determine how changes in U.S. and Mexican real interest rates will affect the value of the U.S. dollar. Describe a regression model that could be used to achieve this purpose. Also explain
the expected sign of the regression coefficient
ln(E t)=β 0+β 1R us +β 2R mx+ϵ t
β 1 (U.S. Real Interest Rate):Expected Sign: Positive (+)
β 2(Mexican Real Interest Rate):Expected Sign: Negative (−)
Nominal interest rate - inflation
real ir = nominal - inflation
Assume there is concern that the United States may experience a recession. How should the Federal Reserve influence the dollar to prevent a recession? How might U.S. exporters react to this policy (favorably or unfavorably)? What about U.S. importing firms?
to prevent a recession, the Federal Reserve would likely aim to weaken the dollar through lower interest rates and possibly other monetary policies. This approach can help boost U.S. exports while creating challenges for importing firms, as they face higher costs for foreign goods. The overall goal of these actions is to stimulate economic activity and counteract recessionary pressures.
Exchange rate %change e = I - I*
The Hong Kong dollar’s value is tied to the U.S. dollar. Explain how the following trade patterns would be affected by the appreciation of the yen against the dollar
a. Hong Kong exports to Japan
b. Hong Kong exports to the United States
Exports to Japan are likely to increase due to the higher effective prices resulting from the yen’s appreciation. So people from japan can purchase more hong kong goods
Exports to the United States would remain relatively unchanged directly, though there could be some indirect effects based on broader economic conditions.
