Solutions Sample Exam 1 FINA 5500 Q1 4 points Assume it is September 2002 The following table provides a forecast of GLM Corp s cash receipt in US Dollars British Pounds and French Francs for September 2003 and September 2004 Also provided are the exchange rate forecasts for pounds and francs during the same time periods September 2003 Receipt Exchange Rate September 2004 Dollar Amount Receipt Exchange Rate Dollar Amount US Dollars 2 000 000 NA 2 000 000 2 500 000 NA 2 500 000 British Pounds 2 800 000 1 45 4 060 000 3 000 000 1 55 4 650 000 French Francs 20 000000 0 35 7 000 000 28 000 000 0 20 5 600 000 Total 13 060 000 12 750 000 If GLM Corp s required rate of return is 14 estimate the how much GLM Corp s total cash receipt is worth now in US dollar terms using the valuation model for an MNC discussed in Chapter 1 Value 13 060 000 1 14 1 12 750 000 1 14 2 12 266 851 Q2 7 points A typical Australian farmer can produce 8000 lbs of wheat or 500 lbs of potatoes per year A typical Canadian farmer can produce 5000 lbs of wheat or 400 lbs of potatoes per year a Based on the above figures please calculate i the number of lbs of potatoes it takes to produce 1 lb of wheat in the Australia 500 8000 0 0625 ii the number of lbs of wheat it takes to produce 1 lb of potato in Canada 5000 400 12 50 b Who has the comparative advantage in the production of potatoes circle one Canada c For each of the exchange rates listed below indicate if Canada and Australia will ACCEPT or REJECT it Exchange Rates Australia Accept Reject Canada Accept Reject 1 lb of potato 11 00 lbs of wheat A R 1 lb of wheat 0 05 lbs of potatoes R A 1 lb of potato 18 50 lbs of wheat R A 1 lb of wheat 0 10 lbs of potatoes A R Wheat Potatoes Australia 500 8000 0 0625 8000 500 16 00 Canada 400 5000 0 050 5000 400 12 50 Q3 6 points Please enter the number associated with each transaction listed below in the proper cells in the following table Credit Debit Goods Merchandise 8 35 4 65 Service 3 10 Net Investment Income 2 5 5 18 Unilateral Transfers Capital Account 6 8 1 15 7 6 Official Reserve 2 Based on the transaction amounts please calculate the following Balance of Payment accounts Balance of Trade 35 10 65 20 million Current Account Balance 35 10 5 65 18 35 million List of transactions 1 A 15 million bond issue in the US by the Japanese Govt 2 Americans receiving 5 million in coupon payments on Japanese Govt bonds 3 10 million casino revenue in Atlantic City from Asian tourists 4 65 million wheat purchase by US from Canada 5 18 million US military assistance to Pakistan 6 Sale of 8 million British Govt Bonds by the US Federal Reserve 7 Purchase of 6 million Euros by the US Federal Reserve 8 Sale of 35 million worth of tennis rackets in Asia by Wilson Q4 10 points Please circle the right words or phrases in the statements listed below a If inflation rate in the US is 5 while the Japanese inflation rate is 3 then i US exports to Japan would decrease ii US imports from Japan would increase iii US trade deficit with Japan would increase b If inflation rate in the US is 5 while the British inflation rate is 9 then i US exports to UK would increase ii US imports from UK would decrease iii US Balance of Trade with UK would increase c If the US GNP increased while the Japanese GNP did not change then i US exports to Japan would not change ii US imports from Japan would increase iii US trade deficit with Japan would increase d If the US GNP decreased while the British GNP did not change then i US exports to UK would not change ii US imports from UK would decrease iii US Balance of Trade with UK would increase e If the US Dollar appreciated against the Japanese yen then i US exports to Japan would decrease ii US imports from Japan would increase iii US trade deficit with Japan would increase f If the US Dollar depreciated against the British Pound then i US exports to UK would increase ii US imports from UK would decrease iii US Balance of Trade with UK would increase g If US trade deficit with Japan decreased then The US dollar is most likely to appreciate against the Japanese yen h If US Balance of Trade with UK decreased then The US dollar is most likely to depreciate against the British pound Q5 10 points During a 2 year period the British Pound BP went from 1 4675 to 1 8850 and both the US and British governments agreed to reverse this trend a This means that they should strengthen the dollar b What action s should both central banks take under a policy of non sterilized intervention buy dollars sell BP c If the central banks in both countries followed a policy of non sterilized intervention this is expected to cause i the supply schedule for BP to increase ii the demand schedule for BP to not change iii the dollar price for BP to decrease d Based on the actions in part b please refer to the graphs on the last page of this exam and identify the one by its letter that best describes what will happen in the FX market for BP Graph E e Based on the actions in part b the money supply in US will decrease f If the central banks in both countries followed a policy of sterilized intervention the US Treasury should buy US government securities g Based on the actions in part f the money supply in US will increase Q6 5 points Currently the spot rate for DM is 0 55 If the German inflation rate remains constant but the US inflation rate is expected to fall then in the FX market please circle one a the supply schedule for DM will increase b the demand schedule for DM will decrease c If the spot rate for DM remains at 0 55 there will be an excess supply of DM d the dollar price for DM will eventually decrease e Please refer to the graphs on the last page of this exam and identify the one by its letter that best describes what will happen in the FX market for DM Graph A Q7 5 points Currently the spot rate for FF is 0 25 If the French GNP level remains constant but the US GNP level is expected to rise then in the FX market please circle one a the supply schedule for FF will increase or not change b the demand schedule for FF will increase c If the …