Microsoft Word - Money, Banking, and Int Finance(scribd).docx

18. DERIVATIVE SECURITIES AND DERIVATIVE MARKETS Money, Banking, and International Finance

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Key Terms

random walk
Purchasing Power Parity Theory
Consumer Price Index
Big Mac Index
transportation costs
Relative Purchasing Power Parity Theory

Quantity Theory of Money

Fisher Effect

International Fisher Effect

uncovered position

covered position

Interest Rate Parity Theorem

Chapter Questions

1. You believe the Malaysian ringgit-U.S. dollar exchange rate follows a random walk. If the
   exchange rate equals 3 rm per U.S. dollar yesterday, what is your best forecast for the
   exchange rate today?


2. Identify the problems with the Purchasing Power Parity.


3. Using data from Table 1, how could you earn the highest profit by transportation Big Mac
   between countries if it were theoretically possible?


4. According to the Big Mac Index, estimate whether the Japanese yen is overvalued or
   undervalued relative to the U.S. dollar?


5. Distinguish between Purchasing Power Parity (PPP) and Relative PPP.


6. Russian has a 7% inflation rate while the United States has a 3%. Using both the exact and
   the approximation, estimate the level of currency depreciation?


7. The United States experiences a 3% inflation rate while Europe has a 2%. If we define the
   United States as the domestic country and the U.S. dollar is appreciating 2% against the
   euro, estimate the U.S. competitiveness ratio.


8. Malaysia experienced a strong GDP growth rate of 7% per year while the United States
   experienced 3%. If Malaysia's central bank expands the money supply at 5% while the
   Federal Reserve expands the money supply 2%, estimate the change to the U.S. dollar-
   ringgit exchange rate.