Question

• 13.  In 2019 Brazil exported $450M and imported $625M in goods and services. Brazilians working abroad made $7M, while foreigners working in Brazil earned only earned $2M. Brazil also, in net, paid out $15M in interest payments to foreign citizens. Finally, the central bank of Brazil experienced a $21M drop in its US dollar asset reserves during this period. You may assume the Brazilian real (the Brazilian currency) and real-denominated assets are not held by other central banks. Based on these numbers, we can say the following about Brazil’s trade accounts:

  A.      KA^p = +$185M; i.e., Private Citizens in Brazil are borrowing $185M from abroad in 2019

  B.      KA^p = +$175; i.e., Private Citizens in Brazil are borrowing $175 M from abroad in 2019

  C.      KA^p = +$164M; i.e., Private Citizens in Brazil are borrowing $164 M from abroad in 2019

  D.      KA^p = −$21M; i.e., Private Citizens in Brazil are borrowing $21M from abroad in 2019

  E.      KA^p = +$21M; i.e., Private Citizens in Brazil are lending $21M abroad in 2019

• QUESTION 14

  14. If the value of 1 dollar is €.85 (in euro) and the value of the Brazilian real is €.45 (again, in euro), the value of the real in terms of the dollar is _______, assuming triangular arbitrage holds.

  A. 1.89 dollars             

  B. .3825 dollars

  C. .5294 dollars                         

  D. 1.30 dollars

• QUESTION 15

  15.    A premium on a call option is high for low strike prices and lower for higher strike prices. This is because

  A.   That’s just the way call options have traditionally been priced.

  B.   The intrinsic value of the call option is higher the lower the strike price.  

  C.   The lower the strike price, the more likely the call option is in-the-money in the future.       

  D.   The intrinsic value of the call option is higher the lower the current underlying (spot rate).

  E.   The lower the currency underlying, the greater time value of the call option.

• QUESTION 16

  16. Suppose $10,000 U.S. zero coupon discount bills that mature in one year are currently selling at discount at $9000.00 and 2000 SEK Swedish Government bills that mature in 1 year are selling at discount at 1600 SEK. If the current value of the dollar in terms of the Swedish Krona is 4 Swedish Krona, a forward contract should price the dollar at ________?

  A. 4.00 SEK                

  B. $4.00             

  C. 4.44 SEK                

  D. 4.50 SEK           

  E. none of the above

Answer 1

1) Current account+capital account= change in official researves

Current account= Export-import+Net factor income from abroad+interest payment-(change in official researves)= - capital account

= 450-625+7-2-15-(-21)= -164

Hence, answer is KA^p = +$164M; i.e., Private Citizens in Brazil are borrowing $164 M from abroad in 2019

2) 1 real= 0.45/0.85= $.5294

3) A premium on a call option is high for low strike prices and lower for higher strike prices. This is because the intrinsic value of the call option is higher the lower the strike price.

4) Forward rate= spot rate*[(1+foreign interest rate)/(1+domestic interest rate)]

Spot rate= 4 Krona per dollar

Foreign (US) rate: (10000/9000)-1 =0.111

Domestic (Swedish) rate= (2000/1600)-1 = 0.25

Forward rate= 4*[1.111/1.25]= 3.555

Hence, none of above is answer