1、International Financial ManagementIM-1SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMSInternational Financial ManagementIM-2CHAPTER 2 INTERNATIONAL MONETARY SYSTEMSUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTERQUESTIONS AND PROBLEMSQUESTIONS2. Explain the mechanism which re
2、stores the balance of payments equilibrium when it is disturbed under the gold standard.Answer: The adjustment mechanism under the gold standard is referred to as the price-specie-flow mechanism expounded by David Hume. Under the gold standard, a balance of payment disequilibrium will be corrected b
3、y a counter-flow of gold. Suppose that the U.S. imports more from the U.K. than it exports to the latter. Under the classical gold standard, gold, which is the only means of international payments, will flow from the U.S. to the U.K. As a result, the U.S. (U.K.) will experience a decrease (increase)
4、 in money supply. This means that the price level will tend to fall in the U.S. and rise in the U.K. Consequently, the U.S. products become more competitive in the export market, while U.K. products become less competitive. This change will improve U.S. balance of payments and at the same time hurt
5、the U.K. balance of payments, eventually eliminating the initial BOP disequilibrium.3. Suppose that the pound is pegged to gold at 6 pounds per ounce, whereas the franc is pegged to gold at 12 francs per ounce. This, of course, implies that the equilibrium exchange rate should be two francs per poun
6、d. If the current market exchange rate is 2.2 francs per pound, how would you take advantage of this situation? What would be the effect of shipping costs?Answer: Suppose that you need to buy 6 pounds using French francs. If you buy 6 pounds directly in the foreign exchange market, it will cost you
7、13.2 francs. Alternatively, you can first buy an ounce of gold for 12 francs in France and then ship it to England and sell it for 6 pounds. In this case, it only costs you 12 francs to buy 6 pounds. It is thus beneficial to ship gold due to the overpricing of the pound. Of course, you can make an a
8、rbitrage profit by selling 6 pounds for 13.2 francs in the foreign exchange market. The arbitrage profit will be 1.2 francs. So far, we assumed that shipping costs do not exist. If it costs more than 1.2 francs to ship an ounce of gold, there will be no arbitrage profit.9. There are arguments for an
9、d against the alternative exchange rate regimes. a. List the advantages of the flexible exchange rate regime. International Financial ManagementIM-3b. Criticize the flexible exchange rate regime from the viewpoint of the proponents of the fixed exchange rate regime.c. Rebut the above criticism from
10、the viewpoint of the proponents of the flexible exchange rate regime.Answer: a. The advantages of the flexible exchange rate system include: (I) automatic achievement of balance of payments equilibrium and (ii) maintenance of national policy autonomy.b. If exchange rates are fluctuating randomly, th
11、at may discourage international trade and encourage market segmentation. This, in turn, may lead to suboptimal allocation of resources. c. Economic agents can hedge exchange risk by means of forward contracts and other techniques. They dont have to bear it if they choose not to. In addition, under a
12、 fixed exchange rate regime, governments often restrict international trade in order to maintain the exchange rate. This is a self-defeating measure. Whats good about the fixed exchange rate if international trade need to be restricted? 10. In an integrated world financial market, a financial crisis
13、 in a country can be quickly transmitted to other countries, causing a global crisis. What kind of measures would you propose to prevent the recurrence of a Asia-type crisis.Answer: First, there should be a multinational safety net to safeguard the world financial system from the Asia-type crisis. S
14、econd, international institutions like IMF and the World Bank should monitor problematic countries more closely and provide timely advice to those countries. Countries should be required to fully disclose economic and financial information so that devaluation surprises can be prevented. Third, count
15、ries should depend more on domestic savings and long-term foreign investments, rather than short-term portfolio capital. There can be other suggestions.11. Discuss the criteria for a good international monetary system.Answer: A good international monetary system should provide (i) sufficient liquidi
16、ty to the world economy, (ii) smooth adjustments to BOP disequilibrium as it arises, and (iii) safeguard against the crisis of confidence in the system.12. Once capital markets are integrated, it is difficult for a country to maintain a fixed exchange rate. Explain why this may be so.Answer: Once ca
17、pital markets are integrated internationally, vast amounts of money may flow in and out International Financial ManagementIM-4of a country in a short time period. This will make it very difficult for the country to maintain a fixed exchange rate.International Financial ManagementIM-5CHAPTER 3 BALANC
18、E OF PAYMENTSSUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTERQUESTIONS AND PROBLEMSQUESTIONS2. Why would it be useful to examine a countrys balance of payments data?Answer: It would be useful to examine a countrys BOP for at least two reasons. First, BOP provides detailed information about the supp
19、ly and demand of the countrys currency. Second, BOP data can be used to evaluate the performance of the country in international economic competition. For example, if a country is experiencing perennial BOP deficits, it may signal that the countrys industries lack competitiveness.9. Since the early
20、1980s, foreign portfolio investors have purchased a significant portion of U.S. treasury bond issues. Discuss the short-term and long-term effects of foreigners portfolio investment on the U.S. balance of payments.Answer: As foreigners purchase U.S. Treasury bonds, U.S. BOP will improve in the short
21、 run. But in the long run, U.S. BOP may deteriorate because the U.S. should pay interests and principals to foreigners. If foreign funds are used productively and contributes to the competitiveness of U.S. industries, however, U.S. BOP may improve in the long run.10. Describe the balance of payments
22、 identity and discuss its implications under the fixed and flexible exchange rate regimes.Answer: The balance of payments identity holds that the combined balance on the current and capital accounts should be equal in size, but opposite in sign, to the change in the official reserves: BCA + BKA = -B
23、RA. Under the pure flexible exchange rate regime, central banks do not engage in official reserve transactions. Thus, the overall balance must balance, i.e., BCA = -BKA. Under the fixed exchange rate regime, however, a country can have an overall BOP surplus or deficit as the central bank will accom
24、modate it via official reserve transactions.International Financial ManagementIM-6PROBLEMS1. 2000 U.S. Balance of PaymentsSolution:Merchandise -1224.43Balance on current account -444.69Balance on capital account 444.26Statistical discrepancies .73International Financial ManagementIM-7CHAPTER 5 THE M
25、ARKET FOR FOREIGN EXCHANGESUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMSQUESTIONS2. What is the difference between the retail or client market and the wholesale or interbank market for foreign exchange?Answer: The market for foreign exchange can be viewed as a two-tier mark
26、et. One tier is the wholesale or interbank market and the other tier is the retail or client market. International banks provide the core of the FX market. They stand willing to buy or sell foreign currency for their own account. These international banks serve their retail clients, corporations or
27、individuals, in conducting foreign commerce or making international investment in financial assets that requires foreign exchange. Retail transactions account for only about 14 percent of FX trades. The other 86 percent is interbank trades between international banks, or non-bank dealers large enoug
28、h to transact in the interbank market.3. Who are the market participants in the foreign exchange market?Answer: The market participants that comprise the FX market can be categorized into five groups: international banks, bank customers, non-bank dealers, FX brokers, and central banks. International
29、 banks provide the core of the FX market. Approximately 100 to 200 banks worldwide make a market in foreign exchange, i.e., they stand willing to buy or sell foreign currency for their own account. These international banks serve their retail clients, the bank customers, in conducting foreign commer
30、ce or making international investment in financial assets that requires foreign exchange. Non-bank dealers are large non-bank financial institutions, such as investment banks, mutual funds, pension funds, and hedge funds, whose size and frequency of trades make it cost- effective to establish their
31、own dealing rooms to trade directly in the interbank market for their foreign exchange needs.Most interbank trades are speculative or arbitrage transactions where market participants attempt to correctly judge the future direction of price movements in one currency versus another or attempt to profi
32、t from temporary price discrepancies in currencies between competing dealers.FX brokers match dealer orders to buy and sell currencies for a fee, but do not take a position themselves. Interbank traders use a broker primarily to disseminate as quickly as possible a currency International Financial M
33、anagementIM-8quote to many other dealers.Central banks sometimes intervene in the foreign exchange market in an attempt to influence the price of its currency against that of a major trading partner, or a country that it “fixes” or “pegs” its currency against. Intervention is the process of using fo
34、reign currency reserves to buy ones own currency in order to decrease its supply and thus increase its value in the foreign exchange market, or alternatively, selling ones own currency for foreign currency in order to increase its supply and lower its price.5. What is meant by a currency trading at
35、a discount or at a premium in the forward market?Answer: The forward market involves contracting today for the future purchase or sale of foreign exchange. The forward price may be the same as the spot price, but usually it is higher (at a premium) or lower (at a discount) than the spot price.6. Why
36、 does most interbank currency trading worldwide involve the U.S. dollar?Answer: Trading in currencies worldwide is against a common currency that has international appeal. That currency has been the U.S. dollar since the end of World War II. However, the euro and Japanese yen have started to be used
37、 much more as international currencies in recent years. More importantly, trading would be exceedingly cumbersome and difficult to manage if each trader made a market against all other currencies.7. Banks find it necessary to accommodate their clients needs to buy or sell FX forward, in many instanc
38、es for hedging purposes. How can the bank eliminate the currency exposure it has created for itself by accommodating a clients forward transaction?Answer: Swap transactions provide a means for the bank to mitigate the currency exposure in a forward trade. A swap transaction is the simultaneous sale
39、(or purchase) of spot foreign exchange against a forward purchase (or sale) of an approximately equal amount of the foreign currency. To illustrate, suppose a bank customer wants to buy dollars three months forward against British pound sterling. The bank can handle this trade for its customer and s
40、imultaneously neutralize the exchange rate risk in the trade by selling (borrowed) British pound sterling spot against dollars. The bank will lend the dollars for three months until they are needed to deliver against the dollars it has sold forward. The British pounds received will be used to liquid
41、ate the sterling loan.International Financial ManagementIM-98. A CD/$ bank trader is currently quoting a small figure bid-ask of 35-40, when the rest of the market is trading at CD1.3436-CD1.3441. What is implied about the traders beliefs by his prices?Answer: The trader must think the Canadian doll
42、ar is going to appreciate against the U.S. dollar and therefore he is trying to increase his inventory of Canadian dollars by discouraging purchases of U.S. dollars by standing willing to buy $ at only CD1.3435/$1.00 and offering to sell from inventory at the slightly lower than market price of CD1.
43、3440/$1.00.9. What is triangular arbitrage? What is a condition that will give rise to a triangular arbitrage opportunity?Answer: Triangular arbitrage is the process of trading out of the U.S. dollar into a second currency, then trading it for a third currency, which is in turn traded for U.S. dolla
44、rs. The purpose is to earn an arbitrageprofit via trading from the second to the third currency when the direct exchange between the two is not in alignment with the cross exchange rate.Most, but not all, currency transactions go through the dollar. Certain banks specialize in making a direct market
45、 between non-dollar currencies, pricing at a narrower bid-ask spread than the cross-rate spread. Nevertheless, the implied cross-rate bid-ask quotations impose a discipline on the non-dollar market makers. If their direct quotes are not consistent with the cross exchange rates, a triangular arbitrag
46、e profit is possible.PROBLEMS1. Using the American term quotes from Exhibit 5.4, calculate a cross-rate matrix for the euro, Swiss franc, Japanese yen, and the British pound so that the resulting triangular matrix is similar to the portion above the diagonal in Exhibit 5.6.Solution: The cross-rate f
47、ormula we want to use is:S(j/k) = S($/k)/S($/j).The triangular matrix will contain 4 x (4 + 1)/2 = 10 elements. SF $Euro 159.91 1.6317 .7478 1.4744International Financial ManagementIM-10Japan (100) 1.0204 .4676 .9220Switzerland .4583 .9036U.K 1.97174. Restate the following one-, three-, and six-mont
48、h outright forward European term bid-ask quotes in forward points.Spot 1.3431-1.3436One-Month 1.3432-1.3442Three-Month 1.3448-1.3463Six-Month 1.3488-1.3508Solution: One-Month 01-06Three-Month 17-27Six-Month 57-728. A bank is quoting the following exchange rates against the dollar for the Swiss franc
49、 and the Australian dollar:SFr/$ = 1.5960-70A$/$ = 1.7225-35An Australian firm asks the bank for an A$/SFr quote. What cross-rate would the bank quote?CFA Guideline Answer:The SFr/A$ quotation is obtained as follows. In obtaining this quotation, we keep in mind that SFr/A$ = SFr/$/A$/$, and that the price (bid or ask) for each transaction is the one that is more advantageous to the bank.The SFr/A$ bid price is the number of SFr the bank is willing to pay to buy one A$. This transaction (buy A$sell SFr
