Please add 1. Complete all three parts of this question. a. Suppose KPM Bank has

Question

Please add 1. Complete all three parts of this question. a. Suppose KPM Bank has the following balance sheet (in billions of dollars): Assets
Liabilities
Reserves
$10
Deposits
$80
Loans
$95
Capital
$25
If net profit of this bank is $2 billion, then what is the return on assets (ROA) and the return on equity (ROE)? Demonstrate that ROE = ROA x EM. (2 marks) b. A bank has $105 billion of assets with average duration of 5 years and $80 billion of liabilities with average duration of 6 years. Conduct a duration analysis for the bank, and show what will happen to the net worth of the bank if interest rates fall by 1%. What action should the bank take to reduce interest rate risk? (4 marks) c. A bank has $80 billion of fixed-rate liabilities, $25 billion of rate-sensitive liabilities, $10 billion of fixed-rate assets, and $95 billion of rate-sensitive assets. Conduct a gap analysis for the bank, and show what will happen to the bank profits if interest rates fall by 1%. What action should the bank take to reduce interest rate risk? (4 marks) 2. Describe, and illustrate with balance sheets of both the Bank of Canada and the direct clearers with the Canadian Payments Association, the change in the monetary base in response to the following transactions: a. A Bank of Canada open market sale to the public of $100 million of Government of Canada securities. (1.5 marks) b. A redeposit of $200 million worth of Government of Canada deposits. (1.5 marks) c. A $300 million advance made by the Bank of Canada to a chartered bank. (1.5 marks) d. A $400 million Purchase and Resale Agreement made by the Bank of Canada with the money market jobbers. (1.5 marks) e. The Bank of Canada intervenes in the foreign exchange market with a $500 million purchase of American currency ($US 1.00 = $Can. 1.55). It uses an open market transaction to sterilize its foreign exchange intervention. (2 marks) f. Rather than an open market transaction, the Bank of Canada shifts Government of Canada deposits to sterilize its foreign exchange intervention in (e) above. (2 marks) 3. Describe the large value transfer system (LVTS), and list the major reasons for adopting the system. (7 marks) Discuss how in the LVTS environment, government deposit shifting is affected by auctions of government balances. (3 marks) 4. Indicate how each of the following international transactions is entered into the Canadian balance of payments with double-entry bookkeeping. Your records should include a description of the transaction being recorded, which specific account is affected (e.g., export, home financial account asset, etc.), and the accompanying credit/debit entry. Example: A Canadian airplane manufacturer imports $5 million in parts from a U.S. firm. It uses a Canadian bank account to pay for the parts. Example Answer: Description
BOP Account
Account (detail)
Credit (+)/Debit (-)
Import of airplane parts from U.S.
Current account (decreases)
Canadian imports increase
-$5 million
U.S. firm’s claim on Canadian deposits
Financial account (increases)
U.S. exports increase
+$5 million
a. An Italian tourist charges $450 to his Mastercard (issued by an Italian bank) for a hotel room in Jasper, Alberta, Canada. (2.5 marks) b. A Chinese catering company purchases $200,000 worth of helium tanks from a Canadian welding firm. The Chinese catering company uses deposits from a bank in China. (2.5 marks) c. A French firm forgives a $250,000 loan to a firm located in in the town of Lac-Mégantic, Quebec, following a deadly rail accident. (2.5 marks) d. Canada donates $10 million in medical and food supplies to Ukraine following a month-long war. (2.5 marks) 5. Describe the major characteristics of the Bretton Woods system and the role of the IMF in this system. Explain why the Bretton Woods system failed. (10 marks) 6. Briefly describe each of the following terms: a. Eurocurrency markets (2 marks) b. international debt crises (2 marks) c. purchasing power parity (2 marks) d. currency arbitrage (2 marks) e. interest-rate parity condition (2 marks) 7. Suppose that the pension you are managing is expecting an inflow of funds of $1 billion next year and you want to make sure you will earn the current interest rate of 5% when you invest the incoming funds in long-term bonds. a. How would you use the options market to do this? (4 marks) b. How would you use the futures market to do this? (4 marks) c. What are the advantages and disadvantages of using a futures contract rather than an option contract? (2 marks) 8. Use the information in the table to answer the following questions.


Exchange rates in Year 2
Exchange rates in Year 1 (i.e., exactly one year previously)
Country
Currency symbol
Per $
Per £
Per €
Per $
Per £
Per €
Canada
C$
1.064
2.106
1.428
1.103
2.060
1.414
Denmark
DKr
5.551
10.99
7.449
5.819
10.87
7.458
Euro
€
0.745
1.475
—
0.780
1.457
—
Japan
¥
122.0
241.5
163.8
112.4
210.0
144.1
Norway
NKr
6.038
11.95
8.101
6.079
11.36
7.792
Sweden
SKr
6.945
13.74
9.318
7.220
13.49
9.254
Switzerland
SFr
1.231
2.436
1.652
1.218
2.276
1.562
UK
£
0.505
—
0.678
0.535
—
0.686
US
$
—
1.979
1.342
—
1.868
1.282
a. Calculate the U.S. dollar-Swiss franc exchange rate (E$/SFr) and the U.S. dollar-British pound exchange rate (E$/£) for Year 1 and Year 2. (2 marks) b. What happened to the value of the U.S. dollar relative to Swiss franc and the British pound between Year 1 and Year 2? Calculate the percentage change in each currency using the U.S. dollar-foreign currency exchange rates in part (a) above. (5 marks) c. Using the information in the table for Year 2, calculate the Japanese yen-Norwegian krone exchange rate. (3 marks) 9. Use the information in the table to answer the following questions.
Country
Foreign currency units per U.S. dollar

Year 1
Year 2
Brazil (real)
2.379
2.088
China (yuan)
8.277
8.004
Mexico (peso)
9.088
11.393
Venezuela (bolivares)
717.27
2144.60
You and a friend, Ying, are considering a summer vacation to one of the two locales: Mexico or Brazil. Mexico’s currency unit is the peso and Brazil’s currency is the real. You live in the United Sates and Ying lives in China. The cost of the hotel room is denominated in local currency units. You and Ying are trying to find the locale with the lowest hotel expenses. The price of a hotel room is 200 reals per night in Brazil and 800 pesos per night in Mexico. Assume these prices remain unchanged between Year 1 and Year 2. a. Calculate the U.S. dollar price of a hotel room in Brazil and in Mexico for Year 1. Calculate these prices for Year 2. Based on your answers, where would you prefer to spend your vacation in Year 1? And, where would you prefer to spend your vacation in Year 2? (3.5 marks) b. For Year 1 and Year 2, calculate the Real-Yuan and the Peso-Yuan exchange rates. (3 marks) c. Using your answer from (b) above and the information in the table, calculate the Chinese yuan price of a hotel room in Brazil and in Mexico for Year 1. Calculate these prices for Year 2. Based on your answers, where would Ying prefer to spend her vacation in Year 1, and in Year 2? (3.5 marks) 10. In June 2017, a Korean investor was considering investing in bank deposits in Korea and Japan. The annual interest rate on Korean deposits was 6.25%, versus 3.75% on deposits in Japan. Suppose the forward rate in June 2017 was equal to Fwon/¥ = 8.2, the expected exchange (rate Korean won per Japanese yen (¥)) was equal to Eewon/¥ = 8.25 won/¥, and the spot exchange rate was equal to Ewon/¥ = 8. a. Does covered interest parity hold in this example? If so, how do you know? Calculate the expected return in Japanese deposits (denominated in Korean won) in this case. (2.5 marks) b. Does uncovered interest parity hold in this example? If so, how do you know? If not, what is the implied risk premium? Which deposit pays a higher expected return? Calculate the return on Japanese deposits (denominated in Korean won) in this case. (2.5 marks) c. Suppose the exchange rate in June 2018 is equal to 8.528 won/¥. Calculate the Korean investor’s actual return, assuming that she invested in Japanese deposits in June 2017. How do these answers compare with those from part (b)? (2.5 marks) d. Consider two Korean investors: one uses speculation and another uses hedging. Based on your previous answers, which one would earn a higher return (or a smaller loss) on Japanese assets between June 2017 and June 2018? Briefly explain why. (2.5 marks) ECON385v5Assignment 2aJune 27, 2017 Please add 1. Complete all three parts of this question. a. Suppose KPM Bank has the following balance sheet (in billions of dollars): Assets
Liabilities
Reserves
$10
Deposits
$80
Loans
$95
Capital
$25
If net profit of this bank is $2 billion, then what is the return on assets (ROA) and the return on equity (ROE)? Demonstrate that ROE = ROA x EM. (2 marks) b. A bank has $105 billion of assets with average duration of 5 years and $80 billion of liabilities with average duration of 6 years. Conduct a duration analysis for the bank, and show what will happen to the net worth of the bank if interest rates fall by 1%. What action should the bank take to reduce interest rate risk? (4 marks) c. A bank has $80 billion of fixed-rate liabilities, $25 billion of rate-sensitive liabilities, $10 billion of fixed-rate assets, and $95 billion of rate-sensitive assets. Conduct a gap analysis for the bank, and show what will happen to the bank profits if interest rates fall by 1%. What action should the bank take to reduce interest rate risk? (4 marks) 2. Describe, and illustrate with balance sheets of both the Bank of Canada and the direct clearers with the Canadian Payments Association, the change in the monetary base in response to the following transactions: a. A Bank of Canada open market sale to the public of $100 million of Government of Canada securities. (1.5 marks) b. A redeposit of $200 million worth of Government of Canada deposits. (1.5 marks) c. A $300 million advance made by the Bank of Canada to a chartered bank. (1.5 marks) d. A $400 million Purchase and Resale Agreement made by the Bank of Canada with the money market jobbers. (1.5 marks) e. The Bank of Canada intervenes in the foreign exchange market with a $500 million purchase of American currency ($US 1.00 = $Can. 1.55). It uses an open market transaction to sterilize its foreign exchange intervention. (2 marks) f. Rather than an open market transaction, the Bank of Canada shifts Government of Canada deposits to sterilize its foreign exchange intervention in (e) above. (2 marks) 3. Describe the large value transfer system (LVTS), and list the major reasons for adopting the system. (7 marks) Discuss how in the LVTS environment, government deposit shifting is affected by auctions of government balances. (3 marks) 4. Indicate how each of the following international transactions is entered into the Canadian balance of payments with double-entry bookkeeping. Your records should include a description of the transaction being recorded, which specific account is affected (e.g., export, home financial account asset, etc.), and the accompanying credit/debit entry. Example: A Canadian airplane manufacturer imports $5 million in parts from a U.S. firm. It uses a Canadian bank account to pay for the parts. Example Answer: Description
BOP Account
Account (detail)
Credit (+)/Debit (-)
Import of airplane parts from U.S.
Current account (decreases)
Canadian imports increase
-$5 million
U.S. firm’s claim on Canadian deposits
Financial account (increases)
U.S. exports increase
+$5 million
a. An Italian tourist charges $450 to his Mastercard (issued by an Italian bank) for a hotel room in Jasper, Alberta, Canada. (2.5 marks) b. A Chinese catering company purchases $200,000 worth of helium tanks from a Canadian welding firm. The Chinese catering company uses deposits from a bank in China. (2.5 marks) c. A French firm forgives a $250,000 loan to a firm located in in the town of Lac-Mégantic, Quebec, following a deadly rail accident. (2.5 marks) d. Canada donates $10 million in medical and food supplies to Ukraine following a month-long war. (2.5 marks) 5. Describe the major characteristics of the Bretton Woods system and the role of the IMF in this system. Explain why the Bretton Woods system failed. (10 marks) 6. Briefly describe each of the following terms: a. Eurocurrency markets (2 marks) b. international debt crises (2 marks) c. purchasing power parity (2 marks) d. currency arbitrage (2 marks) e. interest-rate parity condition (2 marks) 7. Suppose that the pension you are managing is expecting an inflow of funds of $1 billion next year and you want to make sure you will earn the current interest rate of 5% when you invest the incoming funds in long-term bonds. a. How would you use the options market to do this? (4 marks) b. How would you use the futures market to do this? (4 marks) c. What are the advantages and disadvantages of using a futures contract rather than an option contract? (2 marks) 8. Use the information in the table to answer the following questions.


Exchange rates in Year 2
Exchange rates in Year 1 (i.e., exactly one year previously)
Country
Currency symbol
Per $
Per £
Per €
Per $
Per £
Per €
Canada
C$
1.064
2.106
1.428
1.103
2.060
1.414
Denmark
DKr
5.551
10.99
7.449
5.819
10.87
7.458
Euro
€
0.745
1.475
—
0.780
1.457
—
Japan
¥
122.0
241.5
163.8
112.4
210.0
144.1
Norway
NKr
6.038
11.95
8.101
6.079
11.36
7.792
Sweden
SKr
6.945
13.74
9.318
7.220
13.49
9.254
Switzerland
SFr
1.231
2.436
1.652
1.218
2.276
1.562
UK
£
0.505
—
0.678
0.535
—
0.686
US
$
—
1.979
1.342
—
1.868
1.282
a. Calculate the U.S. dollar-Swiss franc exchange rate (E$/SFr) and the U.S. dollar-British pound exchange rate (E$/£) for Year 1 and Year 2. (2 marks) b. What happened to the value of the U.S. dollar relative to Swiss franc and the British pound between Year 1 and Year 2? Calculate the percentage change in each currency using the U.S. dollar-foreign currency exchange rates in part (a) above. (5 marks) c. Using the information in the table for Year 2, calculate the Japanese yen-Norwegian krone exchange rate. (3 marks) 9. Use the information in the table to answer the following questions.
Country
Foreign currency units per U.S. dollar

Year 1
Year 2
Brazil (real)
2.379
2.088
China (yuan)
8.277
8.004
Mexico (peso)
9.088
11.393
Venezuela (bolivares)
717.27
2144.60
You and a friend, Ying, are considering a summer vacation to one of the two locales: Mexico or Brazil. Mexico’s currency unit is the peso and Brazil’s currency is the real. You live in the United Sates and Ying lives in China. The cost of the hotel room is denominated in local currency units. You and Ying are trying to find the locale with the lowest hotel expenses. The price of a hotel room is 200 reals per night in Brazil and 800 pesos per night in Mexico. Assume these prices remain unchanged between Year 1 and Year 2. a. Calculate the U.S. dollar price of a hotel room in Brazil and in Mexico for Year 1. Calculate these prices for Year 2. Based on your answers, where would you prefer to spend your vacation in Year 1? And, where would you prefer to spend your vacation in Year 2? (3.5 marks) b. For Year 1 and Year 2, calculate the Real-Yuan and the Peso-Yuan exchange rates. (3 marks) c. Using your answer from (b) above and the information in the table, calculate the Chinese yuan price of a hotel room in Brazil and in Mexico for Year 1. Calculate these prices for Year 2. Based on your answers, where would Ying prefer to spend her vacation in Year 1, and in Year 2? (3.5 marks) 10. In June 2017, a Korean investor was considering investing in bank deposits in Korea and Japan. The annual interest rate on Korean deposits was 6.25%, versus 3.75% on deposits in Japan. Suppose the forward rate in June 2017 was equal to Fwon/¥ = 8.2, the expected exchange (rate Korean won per Japanese yen (¥)) was equal to Eewon/¥ = 8.25 won/¥, and the spot exchange rate was equal to Ewon/¥ = 8. a. Does covered interest parity hold in this example? If so, how do you know? Calculate the expected return in Japanese deposits (denominated in Korean won) in this case. (2.5 marks) b. Does uncovered interest parity hold in this example? If so, how do you know? If not, what is the implied risk premium? Which deposit pays a higher expected return? Calculate the return on Japanese deposits (denominated in Korean won) in this case. (2.5 marks) c. Suppose the exchange rate in June 2018 is equal to 8.528 won/¥. Calculate the Korean investor’s actual return, assuming that she invested in Japanese deposits in June 2017. How do these answers compare with those from part (b)? (2.5 marks) d. Consider two Korean investors: one uses speculation and another uses hedging. Based on your previous answers, which one would earn a higher return (or a smaller loss) on Japanese assets between June 2017 and June 2018? Briefly explain why. (2.5 marks) ECON385v5Assignment 2aJune 27, 2017 1. Complete all three parts of this question. a. Suppose KPM Bank has the following balance sheet (in billions of dollars): Assets
Liabilities
Reserves
$10
Deposits
$80
Loans
$95
Capital
$25
If net profit of this bank is $2 billion, then what is the return on assets (ROA) and the return on equity (ROE)? Demonstrate that ROE = ROA x EM. (2 marks) b. A bank has $105 billion of assets with average duration of 5 years and $80 billion of liabilities with average duration of 6 years. Conduct a duration analysis for the bank, and show what will happen to the net worth of the bank if interest rates fall by 1%. What action should the bank take to reduce interest rate risk? (4 marks) c. A bank has $80 billion of fixed-rate liabilities, $25 billion of rate-sensitive liabilities, $10 billion of fixed-rate assets, and $95 billion of rate-sensitive assets. Conduct a gap analysis for the bank, and show what will happen to the bank profits if interest rates fall by 1%. What action should the bank take to reduce interest rate risk? (4 marks) 2. Describe, and illustrate with balance sheets of both the Bank of Canada and the direct clearers with the Canadian Payments Association, the change in the monetary base in response to the following transactions: a. A Bank of Canada open market sale to the public of $100 million of Government of Canada securities. (1.5 marks) b. A redeposit of $200 million worth of Government of Canada deposits. (1.5 marks) c. A $300 million advance made by the Bank of Canada to a chartered bank. (1.5 marks) d. A $400 million Purchase and Resale Agreement made by the Bank of Canada with the money market jobbers. (1.5 marks) e. The Bank of Canada intervenes in the foreign exchange market with a $500 million purchase of American currency ($US 1.00 = $Can. 1.55). It uses an open market transaction to sterilize its foreign exchange intervention. (2 marks) f. Rather than an open market transaction, the Bank of Canada shifts Government of Canada deposits to sterilize its foreign exchange intervention in (e) above. (2 marks) 3. Describe the large value transfer system (LVTS), and list the major reasons for adopting the system. (7 marks) Discuss how in the LVTS environment, government deposit shifting is affected by auctions of government balances. (3 marks) 4. Indicate how each of the following international transactions is entered into the Canadian balance of payments with double-entry bookkeeping. Your records should include a description of the transaction being recorded, which specific account is affected (e.g., export, home financial account asset, etc.), and the accompanying credit/debit entry. Example: A Canadian airplane manufacturer imports $5 million in parts from a U.S. firm. It uses a Canadian bank account to pay for the parts. Example Answer: Description
BOP Account
Account (detail)
Credit (+)/Debit (-)
Import of airplane parts from U.S.
Current account (decreases)
Canadian imports increase
-$5 million
U.S. firm’s claim on Canadian deposits
Financial account (increases)
U.S. exports increase
+$5 million
a. An Italian tourist charges $450 to his Mastercard (issued by an Italian bank) for a hotel room in Jasper, Alberta, Canada. (2.5 marks) b. A Chinese catering company purchases $200,000 worth of helium tanks from a Canadian welding firm. The Chinese catering company uses deposits from a bank in China. (2.5 marks) c. A French firm forgives a $250,000 loan to a firm located in in the town of Lac-Mégantic, Quebec, following a deadly rail accident. (2.5 marks) d. Canada donates $10 million in medical and food supplies to Ukraine following a month-long war. (2.5 marks) 5. Describe the major characteristics of the Bretton Woods system and the role of the IMF in this system. Explain why the Bretton Woods system failed. (10 marks) 6. Briefly describe each of the following terms: a. Eurocurrency markets (2 marks) b. international debt crises (2 marks) c. purchasing power parity (2 marks) d. currency arbitrage (2 marks) e. interest-rate parity condition (2 marks) 7. Suppose that the pension you are managing is expecting an inflow of funds of $1 billion next year and you want to make sure you will earn the current interest rate of 5% when you invest the incoming funds in long-term bonds. a. How would you use the options market to do this? (4 marks) b. How would you use the futures market to do this? (4 marks) c. What are the advantages and disadvantages of using a futures contract rather than an option contract? (2 marks) 8. Use the information in the table to answer the following questions.


Exchange rates in Year 2
Exchange rates in Year 1 (i.e., exactly one year previously)
Country
Currency symbol
Per $
Per £
Per €
Per $
Per £
Per €
Canada
C$
1.064
2.106
1.428
1.103
2.060
1.414
Denmark
DKr
5.551
10.99
7.449
5.819
10.87
7.458
Euro
€
0.745
1.475
—
0.780
1.457
—
Japan
¥
122.0
241.5
163.8
112.4
210.0
144.1
Norway
NKr
6.038
11.95
8.101
6.079
11.36
7.792
Sweden
SKr
6.945
13.74
9.318
7.220
13.49
9.254
Switzerland
SFr
1.231
2.436
1.652
1.218
2.276
1.562
UK
£
0.505
—
0.678
0.535
—
0.686
US
$
—
1.979
1.342
—
1.868
1.282
a. Calculate the U.S. dollar-Swiss franc exchange rate (E$/SFr) and the U.S. dollar-British pound exchange rate (E$/£) for Year 1 and Year 2. (2 marks) b. What happened to the value of the U.S. dollar relative to Swiss franc and the British pound between Year 1 and Year 2? Calculate the percentage change in each currency using the U.S. dollar-foreign currency exchange rates in part (a) above. (5 marks) c. Using the information in the table for Year 2, calculate the Japanese yen-Norwegian krone exchange rate. (3 marks) 9. Use the information in the table to answer the following questions.
Country
Foreign currency units per U.S. dollar

Year 1
Year 2
Brazil (real)
2.379
2.088
China (yuan)
8.277
8.004
Mexico (peso)
9.088
11.393
Venezuela (bolivares)
717.27
2144.60
You and a friend, Ying, are considering a summer vacation to one of the two locales: Mexico or Brazil. Mexico’s currency unit is the peso and Brazil’s currency is the real. You live in the United Sates and Ying lives in China. The cost of the hotel room is denominated in local currency units. You and Ying are trying to find the locale with the lowest hotel expenses. The price of a hotel room is 200 reals per night in Brazil and 800 pesos per night in Mexico. Assume these prices remain unchanged between Year 1 and Year 2. a. Calculate the U.S. dollar price of a hotel room in Brazil and in Mexico for Year 1. Calculate these prices for Year 2. Based on your answers, where would you prefer to spend your vacation in Year 1? And, where would you prefer to spend your vacation in Year 2? (3.5 marks) b. For Year 1 and Year 2, calculate the Real-Yuan and the Peso-Yuan exchange rates. (3 marks) c. Using your answer from (b) above and the information in the table, calculate the Chinese yuan price of a hotel room in Brazil and in Mexico for Year 1. Calculate these prices for Year 2. Based on your answers, where would Ying prefer to spend her vacation in Year 1, and in Year 2? (3.5 marks) 10. In June 2017, a Korean investor was considering investing in bank deposits in Korea and Japan. The annual interest rate on Korean deposits was 6.25%, versus 3.75% on deposits in Japan. Suppose the forward rate in June 2017 was equal to Fwon/¥ = 8.2, the expected exchange (rate Korean won per Japanese yen (¥)) was equal to Eewon/¥ = 8.25 won/¥, and the spot exchange rate was equal to Ewon/¥ = 8. a. Does covered interest parity hold in this example? If so, how do you know? Calculate the expected return in Japanese deposits (denominated in Korean won) in this case. (2.5 marks) b. Does uncovered interest parity hold in this example? If so, how do you know? If not, what is the implied risk premium? Which deposit pays a higher expected return? Calculate the return on Japanese deposits (denominated in Korean won) in this case. (2.5 marks) c. Suppose the exchange rate in June 2018 is equal to 8.528 won/¥. Calculate the Korean investor’s actual return, assuming that she invested in Japanese deposits in June 2017. How do these answers compare with those from part (b)? (2.5 marks) d. Consider two Korean investors: one uses speculation and another uses hedging. Based on your previous answers, which one would earn a higher return (or a smaller loss) on Japanese assets between June 2017 and June 2018? Briefly explain why. (2.5 marks) ECON385v5Assignment 2aJune 27, 2017 1. Complete all three parts of this question. a. Suppose KPM Bank has the following balance sheet (in billions of dollars): Assets
Liabilities
Reserves
$10
Deposits
$80
Loans
$95
Capital
$25
If net profit of this bank is $2 billion, then what is the return on assets (ROA) and the return on equity (ROE)? Demonstrate that ROE = ROA x EM. (2 marks) b. A bank has $105 billion of assets with average duration of 5 years and $80 billion of liabilities with average duration of 6 years. Conduct a duration analysis for the bank, and show what will happen to the net worth of the bank if interest rates fall by 1%. What action should the bank take to reduce interest rate risk? (4 marks) c. A bank has $80 billion of fixed-rate liabilities, $25 billion of rate-sensitive liabilities, $10 billion of fixed-rate assets, and $95 billion of rate-sensitive assets. Conduct a gap analysis for the bank, and show what will happen to the bank profits if interest rates fall by 1%. What action should the bank take to reduce interest rate risk? (4 marks) 2. Describe, and illustrate with balance sheets of both the Bank of Canada and the direct clearers with the Canadian Payments Association, the change in the monetary base in response to the following transactions: a. A Bank of Canada open market sale to the public of $100 million of Government of Canada securities. (1.5 marks) b. A redeposit of $200 million worth of Government of Canada deposits. (1.5 marks) c. A $300 million advance made by the Bank of Canada to a chartered bank. (1.5 marks) d. A $400 million Purchase and Resale Agreement made by the Bank of Canada with the money market jobbers. (1.5 marks) e. The Bank of Canada intervenes in the foreign exchange market with a $500 million purchase of American currency ($US 1.00 = $Can. 1.55). It uses an open market transaction to sterilize its foreign exchange intervention. (2 marks) f. Rather than an open market transaction, the Bank of Canada shifts Government of Canada deposits to sterilize its foreign exchange intervention in (e) above. (2 marks) 3. Describe the large value transfer system (LVTS), and list the major reasons for adopting the system. (7 marks) Discuss how in the LVTS environment, government deposit shifting is affected by auctions of government balances. (3 marks) 4. Indicate how each of the following international transactions is entered into the Canadian balance of payments with double-entry bookkeeping. Your records should include a description of the transaction being recorded, which specific account is affected (e.g., export, home financial account asset, etc.), and the accompanying credit/debit entry. Example: A Canadian airplane manufacturer imports $5 million in parts from a U.S. firm. It uses a Canadian bank account to pay for the parts. Example Answer: Description
BOP Account
Account (detail)
Credit (+)/Debit (-)
Import of airplane parts from U.S.
Current account (decreases)
Canadian imports increase
-$5 million
U.S. firm’s claim on Canadian deposits
Financial account (increases)
U.S. exports increase
+$5 million
a. An Italian tourist charges $450 to his Mastercard (issued by an Italian bank) for a hotel room in Jasper, Alberta, Canada. (2.5 marks) b. A Chinese catering company purchases $200,000 worth of helium tanks from a Canadian welding firm. The Chinese catering company uses deposits from a bank in China. (2.5 marks) c. A French firm forgives a $250,000 loan to a firm located in in the town of Lac-Mégantic, Quebec, following a deadly rail accident. (2.5 marks) d. Canada donates $10 million in medical and food supplies to Ukraine following a month-long war. (2.5 marks) 5. Describe the major characteristics of the Bretton Woods system and the role of the IMF in this system. Explain why the Bretton Woods system failed. (10 marks) 6. Briefly describe each of the following terms: a. Eurocurrency markets (2 marks) b. international debt crises (2 marks) c. purchasing power parity (2 marks) d. currency arbitrage (2 marks) e. interest-rate parity condition (2 marks) 7. Suppose that the pension you are managing is expecting an inflow of funds of $1 billion next year and you want to make sure you will earn the current interest rate of 5% when you invest the incoming funds in long-term bonds. a. How would you use the options market to do this? (4 marks) b. How would you use the futures market to do this? (4 marks) c. What are the advantages and disadvantages of using a futures contract rather than an option contract? (2 marks) 8. Use the information in the table to answer the following questions.


Exchange rates in Year 2
Exchange rates in Year 1 (i.e., exactly one year previously)
Country
Currency symbol
Per $
Per £
Per €
Per $
Per £
Per €
Canada
C$
1.064
2.106
1.428
1.103
2.060
1.414
Denmark
DKr
5.551
10.99
7.449
5.819
10.87
7.458
Euro
€
0.745
1.475
—
0.780
1.457
—
Japan
¥
122.0
241.5
163.8
112.4
210.0
144.1
Norway
NKr
6.038
11.95
8.101
6.079
11.36
7.792
Sweden
SKr
6.945
13.74
9.318
7.220
13.49
9.254
Switzerland
SFr
1.231
2.436
1.652
1.218
2.276
1.562
UK
£
0.505
—
0.678
0.535
—
0.686
US
$
—
1.979
1.342
—
1.868
1.282
a. Calculate the U.S. dollar-Swiss franc exchange rate (E$/SFr) and the U.S. dollar-British pound exchange rate (E$/£) for Year 1 and Year 2. (2 marks) b. What happened to the value of the U.S. dollar relative to Swiss franc and the British pound between Year 1 and Year 2? Calculate the percentage change in each currency using the U.S. dollar-foreign currency exchange rates in part (a) above. (5 marks) c. Using the information in the table for Year 2, calculate the Japanese yen-Norwegian krone exchange rate. (3 marks) 9. Use the information in the table to answer the following questions.
Country
Foreign currency units per U.S. dollar

Year 1
Year 2
Brazil (real)
2.379
2.088
China (yuan)
8.277
8.004
Mexico (peso)
9.088
11.393
Venezuela (bolivares)
717.27
2144.60
You and a friend, Ying, are considering a summer vacation to one of the two locales: Mexico or Brazil. Mexico’s currency unit is the peso and Brazil’s currency is the real. You live in the United Sates and Ying lives in China. The cost of the hotel room is denominated in local currency units. You and Ying are trying to find the locale with the lowest hotel expenses. The price of a hotel room is 200 reals per night in Brazil and 800 pesos per night in Mexico. Assume these prices remain unchanged between Year 1 and Year 2. a. Calculate the U.S. dollar price of a hotel room in Brazil and in Mexico for Year 1. Calculate these prices for Year 2. Based on your answers, where would you prefer to spend your vacation in Year 1? And, where would you prefer to spend your vacation in Year 2? (3.5 marks) b. For Year 1 and Year 2, calculate the Real-Yuan and the Peso-Yuan exchange rates. (3 marks) c. Using your answer from (b) above and the information in the table, calculate the Chinese yuan price of a hotel room in Brazil and in Mexico for Year 1. Calculate these prices for Year 2. Based on your answers, where would Ying prefer to spend her vacation in Year 1, and in Year 2? (3.5 marks) 10. In June 2017, a Korean investor was considering investing in bank deposits in Korea and Japan. The annual interest rate on Korean deposits was 6.25%, versus 3.75% on deposits in Japan. Suppose the forward rate in June 2017 was equal to Fwon/¥ = 8.2, the expected exchange (rate Korean won per Japanese yen (¥)) was equal to Eewon/¥ = 8.25 won/¥, and the spot exchange rate was equal to Ewon/¥ = 8. a. Does covered interest parity hold in this example? If so, how do you know? Calculate the expected return in Japanese deposits (denominated in Korean won) in this case. (2.5 marks) b. Does uncovered interest parity hold in this example? If so, how do you know? If not, what is the implied risk premium? Which deposit pays a higher expected return? Calculate the return on Japanese deposits (denominated in Korean won) in this case. (2.5 marks) c. Suppose the exchange rate in June 2018 is equal to 8.528 won/¥. Calculate the Korean investor’s actual return, assuming that she invested in Japanese deposits in June 2017. How do these answers compare with those from part (b)? (2.5 marks) d. Consider two Korean investors: one uses speculation and another uses hedging. Based on your previous answers, which one would earn a higher return (or a smaller loss) on Japanese assets between June 2017 and June 2018? Briefly explain why. (2.5 marks) ECON385v5Assignment 2aJune 27, 2017

Explanation / Answer

ANSWER:

(a) ROA = Net Profit after taxes / Assets

= 2 / (10+95)

= 1.90%

ROE = Net Profit after taxes / Equity capital

= 2 / 25

= 0.08%

EM = Assets/Equity capital

= (10+95)/25

= 4.2

To confirm and demonstrate the ROE formula, we are able to plug the ROA and EM into the above equation. ROE = ROA x EM

= 1.90 X 4.2

= 0.08%

(b) The assets rise in value by:

$105 billion + 1% X 5 years = $5.25 billion

The liabilities rise in value by:

$80 billion + 1% x 6 years = $4.8 billion

Increase in Net Worth: incr. A – incr. L = 5.25 – 4.8 = $0.45 billion

The bank can reduce interest-rate risk by increasing the maturity of assets to a duration of 6 years or reducing the liabilities maturity to 5 years. The bank could also find another willing bank that would engage in an interest-rate swap on assets that have a duration of five years.

(C) Gap Analysis = Rate-sensitive assets – Rate-sensitive liabilities

= 95 – 25

Gap = $70 billion

A 1% decrease in the interest rates will cause a $7 billion increase in profits, explained below.

Change in profits= Gap * -(percentage change)

= $70 * 0.01

= $7 billion increase in profits

(a) Calculate the U.S. dollar-Swiss franc exchange rate (E$/SFr) and the U.S. dollar-British pound exchange rate (E$/£) for Year 1 and Year 2.

Answer: 2009: 1 US dollar = 2.276/1.868 = 1.218 Swiss franc

1 US dollar = 0.686/1.282 = 0.535 British pound

E$/franc = 1/(1.218) = $0.821

E$/pound = 1/(0.535) = $1.869

2010: 1 US dollar = 2.436/1.979 = 1.231 Swiss franc

1 US dollar = 0.678/1.342 = 0.505 British pound

E$/franc = 1/(1.231) = $0.812

E$/pound = 1/(0.505) = $1.980

(B) What happened to the value of the U.S. dollar relative to Swiss franc and the British pound between Year 1 and Year 2? Calculate the percentage change in each currency using the U.S. dollar-foreign currency exchange rates in part (a) above.

ANSWER:

Between Year 1 and Year 2, the value of the US dollar appreciated against the Swiss franc and depreciated against the British pound. The percentage change in the currency relative to the US dollar is listed below:

Percentage change franc:

%chgE$/franc = (0.812-0.821)/0.821 = -0.011 = 1.1% depreciation in the franc compared with the US dollar

Percentage change franc:

%chgE$/pound = (1.980-1.869)/1.869 = 0.059 = 5.9% appreciation in the pound compared with the US dollar

(C) Using the information in the table for Year 2, calculate the Japanese yen-Norwegian krone exchange rate.

ANSWER:

Year 2: Eyen/krone = (122.00 yen/$)/(6.038 krone/$) = 20.205 krone/yen

The exchange rates for yen and krone are both expressed in dollars, however after the

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