Posted: September 13th, 2017

Expected inflation rate

Expected inflation rate

1. A European-based manufacturer ships a machine tool to a buyer in Jordan. The

purchase price is

€375,000. Jordan imposes a 12% import duty on all products purchased from the

European Union. The Jordanian importerthen re-exports the
product to a Saudi Arabian importer, but only after imposing their own resale

fee of22%. Given the following spot exchange rates on May 24,
2004,

Spot rate, Jordanian dinar

(JD) per euro (€) JDO.8700/€

Spot rate, Jordanian dinar

JD per US

dollar JDO.7080/ USD

Spot rate, Saudi Arabian riyal

(SRI) per US dollar

SRl3.750/USD

a) What is the total cost to the Saudi Arabian importer in Saudi Arabian riyal?

b) What is the U.S. dollar equivalent of that

pnce?

(18 marks)

2. A person pays A$240,000 for a new four-bedroom 2400-square-foot home. He

plans to make a 20% down payment, but is

having trouble deciding whether he wants a 15-year-fixed-rate mortgage (6.400%)

or a 30-yearfixed rate (6.875%).

a) What is the monthly

payment, assuming a fully amortising loan of equal payments forthe life ofthe

mortgage?

b) Assume that instead of making a 20% down

payment, he makes a 10% down payment, and finances the remainder at 7.125% fixed

interest for 15 years. What is his monthly payment?
6)

Assume that the home’s total value falls by 25%. lfthe homeownerwas able to now

sell the house, but at the new home value, what would be
his gain or loss on the home and mortgage assuming all ofthe mortgage principal

remains? Use the same assumptions as under part a.
(18

marks)

3. Assume that the export price ofa Nissan XTerra from Osaka, Japan is

¥2,800,000. The exchange rate is ¥110.20/US$. The forecast
rate ofinflation in the United States is 2.0% per year and is 0.0% per year in

Japan.

a) What is the export price forthe XTerra at the

beginning ofthe year expressed in U.S. Dollars?

b) Assuming PPP holds, what should the exchange rate be at the end ofthe year?

6)

Assuming 100% pass-through, what should be the dollar price of an Xterra at the

end one year?

d) Assuming 70% pass-through, what should be

the dollar price of an Xterra at the end one year?

(18 marks)

4. Money and foreign exchange markets in Frankfurt and Sydney are very

efficient. Using the following market information, answerthe following

questions:

Frankfurt

Sydney

Spot

exchange rate (A$/€)

1.2000
1.2000

One-yearTreasury bill rate

6.500%

3.200%

Expected inflation rate

Unknown

2.000%

a) What do the financial markets suggest for inflation

in Europe next year?

b) Estimate today’s one-yearforward exchange rate between the dollar and the

euro.

(18marks)

5. a) Suppose the

Malaysia ringgit devalues by 75% against the dollar. What is the percentage

appreciation ofthe dollar against the Malaysia ringgit?

b)

Suppose the dollar appreciates by 500% against the Colombia peso. How much has

the peso devalued against the dollar?

(14 marks)

5.

Between 2004 and 2007, the price ofa room at the Thailand Sky hotel rose from

baht (B) 3,200 to B 4,500. At the same time, the exchange
rate went from B 1 ,302=$1 in 2004 to B 1,075 = $1 in 2007. By how much has the

dollar cost ofa room at the Thailand Sky hotel changed over
this three-year period?

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