MID TERM practices question and answer chapter 6 PDF

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Summary

practice question with answers that will be tested on the mid term test...

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According to the International Fisher Effect (IFE), calculate the value of A in the following table. (enter 4 decimal places number with no sign or symbol)

Australian dollar (A$)

Real interest rate p.a.

4.25%

Nominal interest rate p.a.

8.32%

Today’s spot rate

After one year spot rate

Australia 1.0832/1.0425 = 1.039040767 Yuan 1.1271/1.0425 = 1.081151079 1.081/1.039 = 1.040423484

1.040423484 x 4.5376 = 4.7210

Chinese yuan (CNY)

Spot rate

4.25%

12.71%

CNY4.5376/ A$

A

BHP Billiton, an Australian Multinational Company, has borrowed fund from China for its subsidiary in China and will pay 2 million Chinese yuan (CNY) including interest in one year. Also, the BHP Billiton has the following market information and considers that the Purchasing Power Parity (PPP) does hold. How much Australian dollar the BHP Billiton will pay that equivalent to 2 million CNY after one year? (enter the whole number with no sign or symbol) Australian dollar (A$) Real interest rate p.a.

4.39%

Nominal interest rate p.a.

7.38%

Today’s spot rate

(1.0738)/(1.1208) = 0.9580 A$0.2247 x (0.9580) = 0.2152 2,000,000 x 0.2152 = 430,400 429,000

Chinese yuan (CNY)

Spot rate

4.39%

12.08%

A$0.2247/CNY

An Australian importer has received goods from China and will pay 2 million Chinese yuan (CNY) in one year. Also, the importer has the following market information and considers that the Purchasing Power Parity (PPP) does hold. How much Australian dollar the importer will make a profit or loss due to change in today’s spot rate after one year according to PPP? (enter the whole number with no sign or symbol) Australian dollar (A$)

Chinese yuan (CNY)

Real interest rate p.a.

4.04%

4.04%

Nominal interest rate p.a.

8.13%

12.90%

Today’s spot rate

0.1877 x 2,000,000 = 375,400 (1.0813)/(1.1290) = 0.9578 2,000,000 x 0.9578 = 1,915,600 0.1877 – 0.1798 = 0.0079 2,000,000 x 0.0079 = 15,800

Spot rate

A$0.1877/CNY...