International Finance Eun

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1) EUN Chapter 2 Question 8; Explain how special drawing rights (SDR) are constructed. Also, discuss the circumstances under which the SDR was created

The SDR is a reserve asset and a denomination currency for international transactions. This reserve was allotted to the members of the IMF who could then use it for transactions amongs themselves or with the IMF. It comprises of four major currencies – the U.S. dollar, Euro, British pound and Japanese yen. It was created to alleviate the pressure on the U.S. dollar as a central reserve currency. In the 1960´s the total value of US gold stock fell short on foreign dollar holdings. It was created as an alternative for the US dollar because of the dollar becoming a less attractive foreign exchange asset due to an shortfall of US dollars.

2) EUN Chapter 2 Question 10; There are arguments for and against the alternative exchange rate regime.
a. List the advantages of the flexible exchange rate regime.

Easier external adjustments

National policy autonomy

Automatically removes disequilibrium of balance of payments

Promotes international trade

b. Criticize the flexible exchange rate regime from the
viewpoint of the proponents of the fixed exchange rate

When future exchange rates are uncertain, businesses tend to shun foreign trade. Countries are not fully benefit from international trade under exchange rate uncertainty, recourses will be allocated suboptimal on a global basis. Proponents of the fixed exchange rate regime are convinced that eliminating this uncertainty will promote international trade.

c. Rebut the above criticism from the viewpoint of the
proponents of the flexible exchange rate regime.

Under the fixed exchange rate regime a country is deprived of its monetary independence. It requires a country to pursue a policy of monetary expansion or contraction in order to maintain stability in its rate of exchange. The fixed exchange rate system does not reflect the true cost-price relationship between the currencies of the countries. No two countries follow the same economic policies. Therefore the cost-price relationship between them go on changing

3) EUN Chapter 4 Problem 12;
a. If you are confident that the exchange rate will be $1.32 in three months, which is higher than the $1.30 forward rate you should buy € 5.000.000,- for a forward rate of $1.30. Your expected dollar profit will be ($1.32 -/- $1.30)x €5.000.000,- = U$D 100.000,- b. If the spot exchange rate will be $1.26/€ which is lower than the forward rate you will have a loss. ($1.26-/-$1.30)x €5.000.000,- = -/- U$D 200.000,- Loss.

4) EUN Chapter 5 Problem 2;
a. If you want to buy € 50.000,- forward you will need € 50.000,-x $1.30/€ = U$D 65.000,- The resent value of $65.000,- needs to be divided by the monthly compound interest rate which is 0.35% which results then in $65.000,-/(1.0035)^3= U$D 64.322,25 . So the cost of the BMW is U$D 64.322,25 at present day.

b. The money market interest rate is 2% so the present value of €50.000,- is € 50.000,-/(1.02)= € 49.019,61. To buy this amount you will need to use the spot exchange rate which is $1.35/€ which will be U$D 66.176,47

I would prefer method a, because then we will be able to save U$D 1.854,22 ($66.176,47 -/- $64.322,25)

5) EUN Chapter 6 Problem 4;
a. Anticipated profit position three contracts:

If the Mexican rises from $0.77275 to $0.83800 we can take a long position in futures because this price is less than the spot price. The anticipated profit will be ($0.83800-/-$0.77275) x 3 contracts x Mexican Peso contract size 500.000 = U$D 97.875,- PROFIT

b. If future price is an unbiased predictor than the spot price equals to future price which will result in ($0.77275-/-$0.77275) x 3 contracts x Mexican Peso contract size 500.000 = U$D 0,- so no profit or no loss

6) EUN Chapter 7 Problem 2;

The value of...
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