International Economic Trends 1988 2000 Federal Reserve Bank of St Louis Source www stls frb org publications index html data Required Data for Statistical Report FINA 5500 Professor Niranjan Tripathy College of Business Administration Rm 175 voice 940 565 3045 fax 940 565 4234 email tripathy unt edu Instructions for Statistical Report FINA 5500 The following pages contain annual data on interest rates inflation rates and percentage change in exchange rates based on indirect quotes for 32 countries including the US for the period 1988 2000 Each one of you is assigned to two foreign countries and a six year time period 1988 1993 or 1995 2000 Please consult the attached list to determine your assigned countries and time period Please use the attached sheet next two pages to answer the questions listed in it based on calculations using the data for the assigned countries and the US during the assigned time period Use geometric instead of arithmetic averages Use exact instead of the approximate method There is only one correct answer to these questions You will be graded on whether or not your answers are correct The necessary information and concepts are all from chapter 4 I will discuss the solutions techniques to these problems only during class I will not discuss them with anyone on an individual basis outside the class Statistical Report FINA 5500 Please complete the next two pages and return to me by the due date listed in the syllabus Name UNT ID Foreign Country 2 Foreign Country 2 Assigned Time Period Economic Variables Inflation Rate US Inflation Rate Foreign Country 1 Inflation Rate Foreign Country 2 Interest Rate US Interest Rate Foreign Country 1 Interest Rate Foreign Country 2 Percentage change in indirect quote Foreign Country 1 Percentage change in direct quote Foreign Country 1 Percentage change in indirect quote Foreign Country 2 Percentage change in direct quote Foreign Country 2 Average Please answer the following five questions Q1 During the assigned time period a US dollar appreciated depreciated choose one in real terms against the currency of Foreign Country 1 b US dollar appreciated depreciated choose one in real terms against the currency of Foreign Country 2 Q2 During the assigned period what was the average uncovered rate of return from the US viewpoint for a Foreign Country 1 b Foreign Country 2 Q3 During the assigned period what was the average uncovered rate of return from the a Foreign Country 1 s viewpoint b Foreign Country 2 s viewpoint Q4 Based on your answers to questions 2 and 3 given perfect hindsight about interest rates and exchange rates changes during the assigned time period you should have a Invest ed borrowed choose one in the US and invested borrowed choose one in Foreign Country 1 b Invested borrowed choose one in the US and invested borrowed choose one in Foreign Country 2 Q5 Assume that you could both borrow and invest at the average interest rates prevailing in foreign countries 1 and 2 and in the US during the assigned time period Also assume that you have a line of credit for one million dollars in the US and an equivalent amount in foreign countries 1 and 2 Given perfect hindsight about interest rates and exchange rates changes in these two countries please calculate your total profit in dollars using uncovered interest arbitrage during the assigned time period b If you followed the strategy chosen in Q4 a b If you followed the strategy chosen in Q4 b Work Sheet Statistical Report Country CANADA Four year time period 1998 1999 2000 2001 Geom Avg Inflation Rate US 1 6 2 2 3 4 3 3 Inflation Rate Foreign Country 1 0 1 7 2 7 2 9 Interest Rate US 5 5 5 3 6 5 4 8 Interest Rate Foreign Country 5 0 4 9 5 7 8 3 Change in CD SR Indirect quote 7 10 0 10 0 00 2 30 Change in CD SR Direct quote 1 1 change in IQ 1 PPP Implications Annual Uncovered Rate for US Annual Uncovered Rate for Canada Suggest investment strategy based on IFE Geometric and Arithmetic Means of Rates and Percentages If the rates for years 1 2 3 N are R1 R2 R3 RN then you can calculate the arithmetic and geometric mean or averages of these rates over the N years as follows Arithmetic Mean R1 R2 R3 RN N Geometric Mean 1 R1 1 R2 1 R3 1 RN 1 N 1 Note that in the geometric mean formula the percentages are written in decimals For example we use 0 10 instead of 10 and 0 02 instead of 2 Also in the end we take the Nth root of the product where N is the number of years in the averaging period It is important to know that the geometric mean is a more accurate measure than the arithmetic mean Always try to use the geometric mean method when calculating averages of rate of returns or percentages Let us assume the following rates of return for the five year period 2000 2004 Rates of return 2000 2001 2002 2003 2005 4 75 8 0 5 23 7 Our estimate of the average rate of return over the 2000 04 period based on Arithmetic Mean 0 0475 0 08 0 005 0 23 0 07 5 0 0545 5 45 Geometric Mean 1 0 0475 1 0 08 1 0 005 1 0 23 1 0 07 1 5 1 1 02746672 1 5 1 0 04973 4 973 4 973 is a more accurate measure of the average return over the 2000 04 period than 5 45