chapter 14 interest rate and currency swaps …

Chapter 1 Why Study Money, Banking, and Financial Markets? 第一章：为什么要研究货币、银行与金融市场1.aggregate income 总收入2.aggregate output 总产出3.aggregate price level 物价总水平4.budget deficit 预算赤字5.GDP 国内生产总值6.unemployment rate 失业率Chapter 2An Overview of the Financial System第二章：金融体系概览1.asset transformation 资产转化2.adverse selection 逆向选择3.asymmetric information 信息不对称4.Eurobond 欧洲债券5.financial panic 金融恐慌6.foreign bonds 外国债券7.liquid 流动性8.economic of scale 规模经济9.primary market 一级市场10.s econdary market 二级市场11.t ransaction costs 交易成本Chapter 3 What Is Money?第三章：什么是货币？modity money 商品货币2.currency 通货3．M14. M25. Fiat money 不兑现货币6. hyperinflation 恶性通货膨胀7. E-cash 电子现金8. M 3Chapter 4 Understanding Interest Rates第四章：理解利率1.real interest rate 实际利率2.coupon bond 息票债券3.indexed bond 指数化债券4.coupon rate 息票利率5.current yield 当期收益率6.yield on a discount basis 贴现基础上的收益率7.present value现值8.discount bond （zero-coupon bond）贴现发行债券（零息债券）9.rate of capital gain资本利得率10.yield to maturity 到期收益率Chapter 5 the behavior of interest rates第五章：利率行为1. opportunity cost 机会成本2. demand curve 需求曲线3. liquidity preference framework 流动性偏好理论4. loanable funds 可贷资金5. loanable funds framework 可贷资金理论6. Fisher effects 费雪效应Chapter 6 the Risk and Term Structure of Interest Rates第6章利率的风险结构与期限结构1. inverted yield curve 翻转的收益率曲线2. junk bonds 垃圾债券3.liquidity premium theory 流动性溢价理论4.preferred habitat theory 期限优先理论5.risk premium 风险溢价6.segmented markets theory 分割市场理论7.yield curve 收益率曲线8.terms structure of interest rates 利率期限结构Chapter 7The Stock Market, the Theory of Rational Expectations, and the efficient Market Hypothesis第7章股票市场、理性预期理论与有效市场假定1. adaptive expectations 适应性预期2. bubble 泡沫3. efficient markets 有效市场4. rational expectations 理性预期5. residual claimant 剩余索取权6. markets fundamentals 市场基本面Chapter 8An Economic Analysis of Financial Structure第8章金融结构的经济学分析1. agency theory 代理理论2. pecking order hypothesis 啄食顺序假定3. debt deflation 债务萎缩4.free-rider problem 免费搭车问题5. incentive-compatible 激励相容6. net worth(equity capital) 净值（权益资本）Chapter 9Banking and the Management of Financial Institutions第9章银行业与金融机构的管理1. compensating balance 补偿性余额2. discount loans 贴现贷款3. discount rates 贴现率4. duration 久期5. excess reserves 超额准备金6. gap analysis 缺口分析7. off-balance-sheet activities 表外业务8. required reserved ratio 法定准备金率9. ROA （return on assets）资产回报率10. ROE （return on equity）股权回报率11. secondary reserves 二级准备金12. vault cash 库存现金Chapter 10 Banking Industry: Structure and Competition 第10章银行业：结构和竞争1. disintermediation 脱媒2. dual banking system 双重银行体制3. economies of scope 范围经济4. financial derivatives 金融衍生工具5. future 期货6. hedge 对冲7. securitization 证券化Chapter 11Economic Analysis of Financial Regulation 第11章银行监管的经济学分析1.leverage ratio 杠杆比例2.leverage ratio 杠杆比例3.regulatory forbearance 监管宽容4.Basel Accord 巴塞尔协议Chapter 12Nonblank Finance第12章非银行金融机构1.annuity 年金2.closed-end fund 封闭式基金3.fully funded 足额基金4.hedge fund 对冲基金5.open-end fund 开放式基金6.load funds 付佣金基金Chapter 13 Financial Derivatives第13章衍生金融工具1.American option 美式期权2.arbitrage 套利3.call option 看涨期权4.currency swap 货币互换5.strike price or exercise price 执行价格6.forward contract 远期合约7.interest-rate swap 利率互换8.long position 多头9.option 期权10.swap 互换11.stock option 股票期权Chapter 14Central Banks and the Federal Reserve System 第14章中央银行的结构与联邦储备体系1.instruments independence 工具独立性2.political business cycle 政治经济周期3.open market operations 公开市场操作4.goal independence 目标独立性Multiple Deposit Creation and the Money Supply Process 第15章多倍存款创造和货币供给过程1.high-powered money 高能的货币2.multiple deposit creation 多倍存款创造3.required reserve ratio 法定存款准备金4.reserves 准备金Chapter 16Determinants of the Money Supply第16章货币供给的决定因素1.money multiplier 货币乘数2.non-borrowed monetary base 非借入基础货币Chapter 17 Tools of Monetary Policy第17章货币政策工具1.discount windows 贴现窗口2.defensive open market operations 防御性公开市场操作3.dynamic open market operations 能动性公开市场操作4.federal funds rate 联邦基金利率5.repurchase agreement 回购协议Conduct of Monetary Policy: Goals and Targets第18章货币政策实施：最终目标和政策指标1.intermediate targets 中介指标2.natural rate of unemployment 自然失业率3.NAIRU(non-accelerating inflation rate of unemployment ) 非加速通货膨胀失业率4.operating target 操作指标5.Phillips curve theory 菲利普斯曲线理论6.real bills doctrine 真实票据原则Chapter 19The Foreign Exchange Market第19章外汇市场1.appreciation 升值2.effective exchange rate index 有效汇率指数3.exchange rate overshooting 汇率超调4.interest parity conditions 利息平价条件w of one price 一价定律6.monetary neutrality 货币中性7.PPP （theory of purchasing power parity）购买力平价理论The International Financial System第20章国际金融体系1.1. balance of payments 国际收支平衡表2.Britton Woods System 布雷顿森林体系3.current account 经常账户4.capital account 资本账户5.fixed exchange rate regime 固定汇率制度6.IMF 国际货币基金组织7.international reserves 国际储备8.managed floating regime，dirty float 有管理的浮动制度或称肮脏的浮动汇率制度9.reserves currency 储备货币10.special drawing rights SDR 特别提款权11.sterilized foreign exchange intervention 冲销性外汇干预Chapter 21Monetary Policy Strategy: The International Experience第21章货币政策策略：国际经验1.dollarization 美元化2.nominal anchor 名义锚3.Seigniorage 铸币税4.time-consistency problem 时间非一致性问题Chapter 22The Demand for Money第22章货币需求1.real money balances 实际货币余额2.liquidity preferences theory 流动性偏好理论3.equation of exchange 交易方程式4.quantity theory of money 货币数量论5.velocity of money 货币流通速度Chapter 23The Keynesian Framework and the ISLM Model第23章凯恩斯理论框架与IS-LM模型1.animal spirits 浮躁情绪2.autonomous consumer expenditure 自主性消费支出3.expenditure multiplier 支出乘数4.IS curve IS曲线5.LM curve LM曲线6.MPC margin propensity to consumer 边际消费倾向Chapter 24Monetary and Fiscal Policy in the ISLM Model第24章IS-LM模型中的货币政策与财政政策1.aggregate demand curve 总需求曲线2.long-run monetary neutrality 长期货币中性3.natural rate level of output 产出的自然率水平pletely crowing out 完全挤出Chapter 25Aggregate Demand and Supply Analysis第25章总需求与总供给分析1.partial crowding out 部分挤出2.modern quantify theory of money 现代货币数量论3.self-correcting mechanism 自我纠错机制4.supply shock 供给冲击Chapter 26 Transmission Mechanisms of Monetary Policy: The Evidence第26章货币政策传导机制的实证分析1.reduced-form evidence 简化形式实证分析2.structural model evidence 结构模型实证分析3.transmission mechanisms of monetary policy 货币政策传导机制4.credit view 信用途径观点Chapter 27 Money and Inflation第27章货币与通货膨胀1.accommodating policy 适应性政策2.demand-pull inflation 需求拉动型通货膨胀3.constant-money-growth-rate rule 单一货币增长率规则4.Ricardo equivalence 李嘉图等价5.cost-push inflation 成本推动型通货膨胀6.monetizing the debt 债务货币化Chapter 28 Rational Expectations: Implications for Policy 第28章理性预期：政策意义1.policy ineffectiveness proposition 政策无效命题。

Quiz for Chapter 12Ⅰ. Fill the following blanks with the proper word or expression1. Y-( )=CA2、National income equals GNP less ( ),plus ( ),less ( ).3. GNP equals GDP ( ) net receipts of factor income from the rest of the world.4. The national income identity for an open economy is ( ).5. When a country 's exports exceed its imports, we say the country has a current account ( ).6. The current account includes ( )7. Any transaction resulting in a payment to foreigners is entered in the balance of payment account as a ( ).8. In a closed economy, national saving always equals ( ).9.When official reserves increase, this will be recorded in the ( ), with ( )sign.10. When debit is bigger than net decrease of the reserve, the difference will go to the ( ).Ⅱ. True or false1. The balance of payments accounts always balance in practice as they must in theory.( )2. Net unilateral transfers are considered part of the current accounts but not a part of national income .( )3. The GNP a country generates over some time period must equal its national income ,the income earned in that period by its factors of production. ( )4. When you buy a share of Microsoft stock , you are buying neither a good or a service , so your purchase dose not show up in GNP. ( )5. If the government deficit rises and private saving and investment do not change much ,the current account surplus must fall by roughly the same account as the increase in the fiscal deficit. ( )6. We include income on foreign investment in the current account because that income really is compensation for the services provided by foreign investments.( )7. Remember that foreign borrowing may not always be a bad idea :a country that borrows abroad to undertake profitable domestic investment can pay its creditors and still have money left over.( )8. Government agencies including central banks can freely hold foreign reserves and intervene officiallyin exchange market.( )9. When the United States lends abroad, a payment is made to foreigners and the capital account is credited.10. One reason intervention is important is that central banks use it as a way of altering the amount of money in circulation.Ⅲ. Answer the following questions:1.Why account keepers adds the account a statistical discrepancy to the balance of payment?2.The nation of Pecunia had a current account deficit of ＄1 billion and a nonreserve financial account surplusof ＄550 million in 2005.(1)What was the balance of payments of Pecunia in that year? What happened to the country’s net foreignassets?(2)Assume that foreign central banks neither buy nor sell Pecunian assets. How did the Pecunian central bankshad purchased ＄600 million of Pecunian assets in 2005? How would this official intervention show up in the balance of payments accounts?(3)How would your answer to (2) change if you learned that foreign central banks had purchased enter foreignbalance of payments accounts?Ⅳ. Fill the following blanks:China's balance of payment in 2000Quiz for Chapter 13Ⅰ. Fill the following blanks with the proper word or expression1. Changes in exchange rates are described asor .2. Foreign exchange deals sometimes specify a value date farther away than two-days-30 days, 90days, 180 days, or even several years. The exchange rates quoted in such transactions are called3. is the most liquid of assets4. The ease with which the asset can be sold or exchange for goods, we call the character is5. A foreignis a spot sale of a currency combined with a forward repurchase of the currency.6. The foreign exchange market is inwhen deposits of all currencies offer the same expected rate of return.7. The price of one currency in terms of another is called an8. All else equal, ain the expected future exchange rate causes a rise in the current exchange rate.9. is the percentage increase in value, it offers over some time period.10. All else equal, anin the interest paid on deposits of a currency causes that currency to appreciate againstforeign currencies.Ⅱ. True or false1. A rate of appreciation of the dollar against the euro is the rate of depreciation of the euro against dollar.( )2. The exchange rate quoted as the price of foreign currency in terms of domestic currency is called direct quotation. ( )3. all else equal, an appreciation of a country's currency makes its goods cheaper for foreigners. ( )4. The foreign exchange market is in equilibrium when deposits of all currencies offer the same expected rate of return. ( )5. All else equal., When a country's currency depreciated, domestic residents find that imports from abroad are more expensive. ( )6. Central bank is at the center of the foreign exchange market.( )7. A depreciation of the dollar against euro today makes euro deposit less attractive on the condition that expected future dollar/euro rate and interest rates do not change.( )8. all else equal, a decrease of the interest paid on deposit of US dollars causes dollars to appreciate against foreign currency.( )9. New York. is the largest foreign exchange market in the world. ( )10. A fall in the expected future exchange rate causes a fall in the current exchange rate.Ⅲ. Answer the following questions:1. Currently, the spot exchange rate is US$1=SF1.50 and the expected exchange rate for six month is SF1.55. the interest rate is 8% in the US per annum and 10% in the Switzerland per annum. （1）Determine whether interest rate parity is currently holding.（2）If it is not holding, what will happen in the foreign exchange market?.（3）If the expected exchange rate is unchanged, what is the spot rate when foreign exchange rate is inequilibrium?2.Suppose the dollar interest rate and the pound sterling interest rate are the same, 5 percent per year. What is the relation between the current equilibrium ＄/￡exchange rateand its expected future level? Suppose the expected future ＄/￡exchange rate, ＄1.52 per pound, remains constant as Britain’s interest rate rises to 10 percent per year. If the U.S. interest rate also remains constant, what is the new equilibrium ＄/￡exchange rate?Quiz for Chapter 14Ⅰ. Fill the following blanks with the proper word or expression1. M1 includes __________.2. An economy 's money supply is controlled by _________________.3. Three main factors that determine aggregate money demand are4. When money supply equals money demand, we say that the money market is _______________________.5. A rise in the average value of transactions carried out by a household or firm cause its demand for money to.6. is an important phenomenon because it helps explain why exchange rates move so sharply from day to day.7. If the economy is initially at full employment, a permanent increase in the money supply eventually be followed byin the price level.8. Overshooting is a direct consequence of the short-run9. An economy’sis the position it would eventually reach if no new economic shocks occurred during the adjustment to full employment.10. All else equal, a permanent in a country’s money supply causes a proportional long-rundepreciation of its currency against foreign currencies.Ⅱ. True or false1. An increase in real output lowers the interest rate. ( )2. In the short run, a reduction in a country's money supply causes its currency to appreciate in the foreign exchange market. ( )3. All else equal, an increase in a country 's money supply causes a proportional increase in its price level in the long run. ( )3. All else equal, a rise in the interest rate causes the demand for money to fall. ( )4. If there is initially an excess demand of money, the interest rate falls in the short-run. ( )5. A rise in the average value of transactions carried out by a household or firm causes its demand for money to fall. ( )6. Given the price level and out put, an increase in the money supply lowers the interest rate. ( )7. A change in the supply of money has effect on the long-run values of the interest rate or real output. ( )8.The higher the interest rate, the more you sacrifice by holding wealth in the form of money. ( )9. An increase in real output lowers the interest rate, given the price level and the money supply( )10. An economy experiences inflation when its price level is falling. ( )Ⅲ. Answer the following questions:1. What is the short-run effect on the exchange rate when US government increases the money supply? (expectations about future exchange rate are unchanged)2.Please draw a group of pictures to show the time paths of U.S. economic variables after a permanent increase in the U.S. money supply growth rate according to the following:(1)The u.s. decided to increase the money supply growth rate permanently.The vertical axis is money supply and the horizontal axis is time.(2)The interest rate change,. The vertical axis is Dollar interest rate and the horizontal axis is time.(3)The price level change. The vertical axis is U.S price level and the horizontal axis is time.(4)The exchange rate change,. The vertical axis is the Dollar/Euro exchange rate and the horizontal axis is time.Ⅳ. CALCULATIONSuppose that the spot rate is €1 = US$1.2468 －78 and the six-month forward rate is €1 = US$1.2523－33, the interest rate per annum is 4% in the euro zone and 6% in the US. After carrying out interest arbitrage with €5,000,000 borrowed at the above-mentioned rate, please calculate your net interest arbitrage profit ( other costs ignored ).Quiz for Chapter 15Ⅰ. Fill the following blanks with the proper word or expression1. The equation for real interest parity is.2. The long-run relationship between inflation and interest rates is called .3. The equation for absolute PPP is _________________________.4. The equation for relative PPP is _________________________.5. The law of_______________ states that under free competition and in the absence of trade impediments, a good must sell for a single price regardless of where in the world it is sold.6. Equation$/$/()/E US q E P P ∈∈=⨯ shows that at unchanged output prices, nominal depreciation implies real.7. According to Fisher effect, if U.S. inflation were to rise, then U.S. dollar interest rates would_________________.8. _________________is the relative price of two output baskets, while _________________is the relative price of two currencies.9. Transport costs and government trade restrictions make it expensive to move goods between markets located in different countries and therefore weaken the _________________mechanism underlying PPP. 10. refer to those goods and services that can never be traded internationally at a profit.Ⅱ. True or false1. According to monetary approach, a rise in the interest rate on dollar will lead to the depreciation of the dollar in the long run.( )2. According to monetary approach, a rise in European output causes the Euro to appreciate. ( )3. When demand for American products rises, there will be a long-run real depreciation of the dollar. ( )4. According to monetary approach, a rise in European output causes the Euro to appreciate. ( )5. When European output supply increases, there will be an appreciation of the euro. ( )6. Expected real interest rates are the same in different countries when relative PPP is expected to hold. ( )7. Based on the monetary approach, other things equal, a permanent rise in the U.S. money supply causes a proportional long-run appreciation of the dollar against euro. ( )8. At unchanged output prices, nominal depreciation implies real appreciation. ( )9. Departures from PPP may be even greater in the short run than in the long run because many prices in the economy are sticky and take time to adjust fully. ( )10. If all U.S. prices increase by 10% and the dollar depreciates against foreign currencies by 10%, absolute PPP will be satisfied (assuming there are no changes abroad) for any domestic and foreign choices of price level indexes. ( )Ⅲ. Answer the following questions :1. Suppose America’s inflation rate is 6% over one year, but the inflation rate in Italy is 12%. According to relative PPP, what should happen over the year to the dollar ’s exchange rate against the lira?2.How to explain the problems with PPP? Give the reasons.Quiz for Chapter 16Ⅰ. Fill the following blanks with the proper word or expression1. The aggregate demand for an open economy’s output consists of four components:2. The current account balance is determined by two main factors: and3. Equilibrium in the economy as a whole requires equilibrium in theas well as in the4. An temporary increase in the money supply causes aof the domestic currency, of output,and thereforein employment.5. Given a fixed exchange rate, when government demand increases, DD schedule will shift6. A reduction in money demand would shift AA ___________.7. __________ policy works through changes in government spending or taxes.8. If the economy starts at long-run equilibrium, a permanent change in fiscal policy has no net effect on .9. J-curve effects amplify the of exchange rates10. Because a permanent fiscal expansion changes exchange-rate expectations, the effect on output isif the economy stats in long-run equilibrium.Ⅱ. True or false1. If there is a decline in investment demand, the DD schedule will shift to the right. ( )2. The effect of real exchange rate increase on IM is ambiguous. ( )3. A temporary increase in the money supply, which does not alter the long-run expected exchange rate, causes a depreciation of the currency and a rise in output. Temporary fiscal expansion also has the same result. ( )4. Other things equal, a real depreciation of the home currency lowers aggregate demand for home output. ( )5. The DD Schedule shows all exchange rate and output levels at which the outputmarket is in short-run equilibrium. DD Schedule slopes upward. ( )6. A permanent fiscal expansion does not changes exchange-rate expectations. ( )7. Since the effect is the same of that of an increase in G, an increase in T must cause the DD Schedule to shift rightward. ( )8. A rise in R* causes an upward shift of AA. ( )9. Either an increase in the money supply or temporary fiscal ease can be used to maintain full employment. The two polices have no different effects at all. ( )10.If exports and imports adjust gradually to real exchange rate changes, the current account may follow a J-curve pattern after a real currency appreciation, first worsening and then improving. ( )11. The greater the upward shift of the asset market equilibrium schedule, the greater the appreciation of the currency. ( )12. Monetary expansion causes the current account balance to decrease in the short run. ( )13. Expansionary fiscal policy reduces the current account balance. ( )Ⅲ. Answer the following questions:1. A new government is elected and announces that once it is inaugurated, it will increase the money supply. Use the DD-AA model to study the economy’s response to this announcement.2. Please use AA and DD schedules to describe “The adjustment to a permanent increase in the money supply. ” The original point is at full employment.The vertical axis is exchange rate, the horizontal axis is output.3. If an economy does not start out at full employment,is it still true that a permanent change in fiscal policy has no current effect on output? Please use AA and DD schedules to describe it.Quiz for Chapter 17Ⅰ. Fill the following blanks with the proper word or expression1. Any central bank purchase of assets automatically results in an in the domestic money supply.2. The condition of the foreign exchange market equilibrium under a fixed exchange rate is .3. Under a fixed exchange rate, central bankpolicy tools is more effective.4. The expectation of a future devaluation causes ain the home interest rate above the world level.5. The main factor that may lead to imperfect asset substitutability in the foreign exchange market is .6. Between the end of World War II and 1973, was the main reserve currency.7. Under a gold standard, each country fixes the price of its currency in terms of .8. Under a _________, central bank monetary policy tools are powerless to affect the economy’s money supply or its output.9. A system which governments may attempt to moderate exchange rate movements without keeping exchangerates rigidly fixed is____________.10. Half way between the gold standard and a pure reserve currency standard is the __________.Ⅱ. True or false1. Any central bank sale of assets automatically causes the money supply to decline. ( )2. If central banks are not sterilizing and the home country has a balance of payments surplus, any increase in the home central bank’s foreign assets implies an decreased home money supply. ( )3. Under a fixed exchange rate, central bank monetary policy tools are powerful to affect the economy’s money supply. ( )4. The expectation of a future revaluation causes a rise in foreign reserves. ( )5 When domestic and foreign currency bonds are imperfect substitutes, equilibrium in the foreign market requires that the domestic interest rate equal the expected domestic currency return on foreign bonds subtract a risk premium. ( )6. Between the end of World War II and 1973, the exchange rate system was one in which exchange rate between any two currencies were floating. ( )7.Under the reserve currency standard, the center country has to intervene the exchange rate. ( )8. The central bank can negate the money supply effect of intervention through sterilization.( )9. A system of managed floating allows the central bank to retain some ability to control the domestic money supply, but at the cost of greater exchange rate instability.( )10. A world system of fixed exchange rates in which countries peg the prices of their currencies in terms of a reserve currency does not involve a striking asymmetry.()Ⅲ. Answer the following questions:1. Why governments sometimes choose to devalue their currencies?2. How does fiscal expansion affect a country’s output and the central bank’s balance sheet under fixed exchange rate?3. Can you think of reasons why a government might willingly sacrifice some of its ability to use monetary policy so that it can have stable exchange rates?4. Explain why temporary and permanent fiscal expansions do not have different effects under fixed exchange rates, as they do under floating.Quiz for Chapter 18—21Ⅰ. Fill the following blanks with the proper word or expression1. The channels of interdependence depend, in turn, on the monetary and exchange rate arrangements that countries adopt-a set of institutions called the （）.2. In open economies, policymakers are motivated by the goals of internal and external balance. Simply defined, ( )requires the full employment of a country’s resources and domestic price level stability.3. A country is said to be in( ) when the sum of its current and its no reserve capital accounts equals zero, so that the current account balance is financed entirely by international lending without reserve movements.4. The gold standard contains some powerful automatic mechanisms that contribute to the simultaneous achievement of balance of payments equilibrium by all countries .That mechanisms is( ).5. ( ) is one currency that may be freely exchanged for foreign currencies.6、Under the Bretoon Woods system ,( ) or ( )can be used to influence output and thus help the government achieve its internal goal of full employment.7、Fiscal policy is also called ( ),because it alters the level of the economy’s total demand for goods and services.; The accompanying exchange rate adjustment is called ( ), Because it changes the direction of demand ,shifting it between domestic output and imports.8、Bretton Woods system give ( )the leading position in the world economy.9、Bretton Woods system require that other currency should peg with ( )10、Under the fixed rate system, if the exchange rate change, the foreign reserves will ( )11、( ) symmetry and exchange rate as automatic stabilizers are the advantages of floating rate system.12、( ) predict the collapse of the Bretton Woods system.13、The level of ( ) in the European Union is too small to cushion member countries from adverse economic events.14、The ( ) schedule shows the relationship between the monetary efficiency gain and the degree of economic integration.Ⅱ. True or false1. In an open economy, macroeconomic policy has two basic goals, internal balance (full employment with price stability) and external balance (avoiding excessive imbalances in international payments)( )2. The gold standard era starts in 1861 and end in 1914.( )3. The countries with the weak investment opportunities should be net importers of currently available output (and thus have current account surpluses), while countries with the good investment opportunities should be net exporters of current output (and have current account deficits).( )4. Each member of IMF contributed to the Fund an amount of gold equal in value to three-fourth of its quota. The remaining one-fourths of its quota took the form of a contribution of its own national currency. ( )5、Balance of payment crisis became increasingly frequent and violent throughout the 1960 and early 1970s.The events led to the Bretoon Woods system’s collapse.（）6、One interpretation of the Bretoon Woods system’s collapse is that the foreign countries were forced to import US. Inflation through the mechanism to stabilize their price levels and regain internal balance, they had toabandon fixed exchange rates and allow their currency to float.（）7、Speculation on changes in exchange rats could lead to instability in foreign exchange markets . （）8.Under the fixed rate system, the government is required to use foreign reserve to stabilize exchange rate.（）9.The U.S. Federal Reserve played the leading role in determining their owns domestic money supply.（）10.Advocates of floating argued that floating rates would allow each country to choose its own desired long-run inflation rate rather than passively importing the inflation rate established abroad. （）11.The eight original participant in the EMS’s exchange rate mechanism------France, German, Italy, Belgium, Denmark, Ireland, Luxembourg, and the Netherlands. ( )。

Chapter 14 (3)Exchange Rates and the Foreign Exchange Market: An Asset ApproachChapter OrganizationExchange Rates and International TransactionsDomestic and Foreign PricesExchange Rates and Relative PricesThe Foreign Exchange MarketThe ActorsBox: Exchange Rates, Auto Prices, and Currency WarsCharacteristics of the MarketSpot Rates and Forward RatesForeign Exchange SwapsFutures and OptionsThe Demand for Foreign Currency AssetsAssets and Asset ReturnsBox: Nondeliverable Forward Exchange Trading in AsiaRisk and LiquidityInterest RatesExchange Rates and Asset ReturnsA Simple RuleReturn, Risk, and Liquidity in the Foreign Exchange MarketEquilibrium in the Foreign Exchange MarketInterest Parity: The Basic Equilibrium ConditionHow Changes in the Current Exchange Rate Affect Expected ReturnsThe Equilibrium Exchange RateInterest Rates, Expectations, and EquilibriumThe Effect of Changing Interest Rates on the Current Exchange RateThe Effect of Changing Expectations on the Current Exchange RateCase Study: What Explains the Carry Trade?SummaryAPPENDIX TO CHAPTER 14 (3): Forward Exchange Rates and Covered Interest Parity© 2015 Pearson Education LimitedChapter OverviewThe purpose of this chapter is to show the importance of the exchange rate in translating foreign prices into domestic values as well as to begin the presentation of exchange rate determination. Central to the treatment of exchange rate determination is the insight that exchange rates are determined in the same way a s other asset prices. The chapter begins by describing how the relative prices of different countries’ goods are affected by exchange rate changes. This discussion illustrates the central importance of exchange rates for cross-border economic linkages. The determination of the level of the exchange rate is modeled in the context of the exchange rate’s role as the relative price of foreign and domestic currencies, using the uncovered interest parity relationship.The euro is used often in examples. Some students may not be familiar with the currency or aware of which countries use it; a brief discussion may be warranted. A full treatment of EMU and the theories surrounding currency unification appears in Chapter 20(9).The description of the foreign exchange market stresses the involvement of large organizations (commercial banks, corporations, nonbank financial institutions, and central banks) and the highly integrated natureof the market. The nature of the foreign exchange market ensures that arbitrage occurs quickly so that common rates are offered worldwide. A comparison of the trading volume in foreign exchange markets to that in other markets is useful to underscore how quickly price arbitrage occurs and equilibrium is restored. Forward foreign exchange trading, foreign exchange futures contracts, and foreign exchange options play an important part in currency market activity. The use of these financial instruments to eliminate short-run exchange rate risk is described.The explanation of exchange rate determination in this chapter emphasizes the modern view that exchange rates move to equilibrate asset markets. The foreign exchange demand and supply curves that introduce exchange rate determination in most undergraduate texts are not found here. Instead, there is a discussion of asset pricing and the determination of expected rates of return on assets denominated in different currencies.Students may already be familiar with the distinction between real and nominal returns. The text demonstrates that nominal returns are sufficient for comparing the attractiveness of different assets. There is a brief description of the role played by risk and liquidity in asset demand, but these considerations are not pursued in this chapter. (The role of risk is taken up again in Chapter 18[7].)Substantial space is devoted to the topic of comparing expected returns on assets denominated in domestic and foreign currency. The text identifies two parts of the expected return on a foreign currency asset (measured in domestic currency terms): the interest payment and the change in the value of the foreign currency relative to the domestic currency over the period in which the asset is held. The expected return on a foreign asset is calculated as a function of the current exchange rate for given expected values of the future exchange rate and the foreign interest rate.The absence of risk and liquidity considerations implies that the expected returns on all assets traded in the foreign exchange market must be equal. It is thus a short step from calculations of expected returns on foreign assets to the interest parity condition. The foreign exchange market is shown to be in equilibrium only when the interest parity condition holds. Thus, for given interest rates and given expectations about future exchange rates, interest parity determines the current equilibrium exchange rate. The interest parity diagram introduced here is instrumental in later chapters in which a more general model is presented. Because a command of this interest parity diagram is an important building block for future work, we recommend drills that employ this diagram.The result that a dollar appreciation makes foreign currency assets more attractive may appear counterintuitive to students—why does a stronger dollar reduce the expected return on dollar assets? The key to explaining this point is that, under the static expectations and constant interest rates assumptions, a dollar appreciation today implies a greater future dollar depreciation; so, an American investor can expect to gain not only theChapter 14Exchange Rates and the Foreign Exchange Market: An Asset Approach 77© 2015 Pearson Education Limitedforeign interest payment but also the extra return due to the dollar’s additional future depreciation. The following diagram illustrates this point. In this diagram, the exchange rate at time t + 1 is expected to be equal to E . If the exchange rate at time t is also E , then expected depreciation is 0. If, however, the exchange rate depreciates at time t to E ', then it must appreciate to reach E at time t + 1. If the exchange rate appreciates today to E ", then it must depreciate to reach E at time t + 1. Thus, under static expectations, a depreciation today implies an expected appreciation and vice versa.Figure 14(3)-1This pedagogical tool can be employed to provide some further intuition behind the interest parityrelationship. Suppose that the domestic and foreign interest rates are equal. Interest parity then requires that the expected depreciation is equal to zero and that the exchange rate today and next period is equal to E . If the domestic interest rate rises, people will want to hold more domestic currency deposits. The resulting increased demand for domestic currency drives up the price of domestic currency, causing the exchange rate to appreciate. How long will this continue? The answer is that the appreciation of the domestic currency continues until the expected depreciation that is a consequence of the domestic currency’s appreciation today just offsets the interest differential.The text presents exercises on the effects of changes in interest rates and of changes in expectations of the future exchange rate. These exercises can help develop students’ intuition. For example, the initial result of a rise in U.S. interest rates is a higher demand for dollar-denominated assets and thus an increase in the price of the dollar. This dollar appreciation is large enough that the subsequent expected dollar depreciation just equalizes the expected return on foreign currency assets (measured in dollar terms) and the higher dollar interest rate.The chapter concludes with a case study looking at a situation in which interest rate parity may not hold: the carry trade. In a carry trade, investors borrow money in low-interest currencies and buy high-interest-rate currencies, often earning profits over long periods of time. However, this transaction carries an element of risk as the high-interest-rate currency may experience an abrupt crash in value. The case study discusses a popular carry trade in which investors borrowed low-interest-rate Japanese yen to purchase high-interest-rate Australian dollars. Investors earned high returns until 2008, when the Australian dollar abruptly crashed, losing 40 percent of its value. This was an especially large loss as the crash occurred amidst a financial crisis in which liquidity was highly valued. Thus, when we factor in this additional risk of the carry trade, interest rate parity may still hold.The Appendix describes the covered interest parity relationship and applies it to explain the determination of forward rates under risk neutrality as well as the high correlation between movements in spot and forward rates.Answers to Textbook Problems1. At an exchange rate of 1.05 $ per euro, a 5 euro bratwurst costs 1.05$/euro ⨯ 5 euros = $5.25. Thus,the bratwurst in Munich is $1.25 more expensive than the hot dog in Boston. The relative price is $5.25/$4 = 1.31. A bratwurst costs 1.31 hot dogs. If the dollar depreciates to 1.25$/euro, the bratwurst now costs 1.25$/euro ⨯ 5 euros = $6.25, for a relative price of $6.25/$4 = 1.56. You have to give up1.56 hot dogs to buy a bratwurst. Hot dogs have become relatively cheaper than bratwurst after thedepreciation of the dollar.2. If it were cheaper to buy Israeli shekels with Swiss francs that were purchased with dollars than todirectly buy shekels with dollars, then people would act upon this arbitrage opportunity. The demand for Swiss francs from people who hold dollars would rise, causing the Swiss franc to rise in value against the dollar. The Swiss franc would appreciate against the dollar until the price of a shekel would be exactly the same whether it was purchased directly with dollars or indirectly through Swiss francs.3. Take for example the exchange rate between the Argentine peso, the US dollar, the euro, and theBritish pound. One dollar is worth 5.3015 pesos, while a euro is worth 7.0089 pesos. To rule out triangular arbitrage, we need to see how many pesos you would get if you first bought euros with your dollars (at an exchange rate of 0.7564 euros per dollar), then used these euros to buy pesos. In other words, we need to compute E D = E EUR/USD × E ARG/EUR = 0.7564× 7.0089 = 5.3015 pesos per dollar. This is almost exactly (with rounding) equal to the direct rate of pesos per dollar.Following the same procedure for the British pound yields a similar result.We need to say that triangular arbitrage is “approximately” ruled out for several reasons. First,rounding error means that there may be some small discrepancies between the direct and indirect exchange rates we calculate. Second, transactions costs on trading currencies will prevent complete arbitrage from occurring. That said, the massive volume of currencies traded make these transactions costs relatively small, leading to “near” perfect arbitrage.4. A depreciation of Chinese yuan makes the import more expensive. Since the demand for oil isinelastic, China needs to import oil from the oil exporting countries. This leads to spending more on oil when the exchange rate falls in value. This can cause the balance of payment to worsen in the short run. Hence, a depreciation of domestic currency may or may not have a favourable impact on the balance of payment in the short run.5. The dollar rates of return are as follows:a. ($250,000 - $200,000)/$200,000 = 0.25.b. ($275 - $255)/$255 = 0.08.c. There are two parts to this return. One is the loss involved due to the appreciation of the dollar;the dollar appreciation is ($1.38 - $1.50)/$1.50 =-0.08. The other part of the return is the interest paid by the London bank on the deposit, 10 percent. (The size of the deposit is immaterial to thecalculation of the rate of return.) In terms of dollars, the realized return on the London depositis thus 2 percent per year.。

CHAPTER 14 INTEREST RATE AND CURRENCY SWAPSSUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTERQUESTIONS AND PROBLEMSQUESTIONS1. Describe the difference between a swap broker and a swap dealer.Answer: A swap broker arranges a swap between two counterparties for a fee without taking a risk position in the swap. A swap dealer is a market maker of swaps and assumes a risk position in matching opposite sides of a swap and in assuring that each counterparty fulfills its contractual obligation to the other.2. What is the necessary condition for a fixed-for-floating interest rate swap to be possible?Answer: For a fixed-for-floating interest rate swap to be possible it is necessary for a quality spread differential to exist. In general, the default-risk premium of the fixed-rate debt will be larger than the default-risk premium of the floating-rate debt.3. Discuss the basic motivations for a counterparty to enter into a currency swap.Answer: One basic reason for a counterparty to enter into a currency swap is to exploit the comparative advantage of the other in obtaining debt financing at a lower interest rate than could be obtained on its own. A second basic reason is to lock in long-term exchange rates in the repayment of debt service obligations denominated in a foreign currency.4. How does the theory of comparative advantage relate to the currency swap market?Answer: Name recognition is extremely important in the international bond market. Without it, even a creditworthy corporation will find itself paying a higher interest rate for foreign denominated funds than a local borrower of equivalent creditworthiness. Consequently, two firms of equivalent creditworthiness can each exploit their, respective, name recognition by borrowing in their local capital market at a favorable rate and then re-lending at the same rate to the other.5. Discuss the risks confronting an interest rate and currency swap dealer.Answer: An interest rate and currency swap dealer confronts many different types of risk. Interest rate risk refers to the risk of interest rates changing unfavorably before the swap dealer can lay off on an opposing counterparty the unplaced side of a swap with another counterparty. Basis risk refers to the floating rates of two counterparties being pegged to two different indices. In this situation, since the indexes are not perfectly positively correlated, the swap bank may not always receive enough floating rate funds from one counterparty to pass through to satisfy the other side, while still covering its desired spread, or avoiding a loss. Exchange-rate risk refers to the risk the swap bank faces from fluctuating exchange rates during the time it takes the bank to lay off a swap it undertakes on an opposing counterparty before exchange rates change. Additionally, the dealer confronts credit risk from one counterparty defaulting and its having to fulfill the defaulting party’s obligation to the other counterparty. Mismatch risk refers to the difficulty of the dealer finding an exact opposite match for a swap it has agreed to take. Sovereign risk refers to a country imposing exchange restrictions on a currency involved in a swap making it costly, or impossible, for a counterparty to honor its swap obligations to the dealer. In this event, provisions exist for the early termination of a swap, which means a loss of revenue to the swap bank.6. Briefly discuss some variants of the basic interest rate and currency swaps diagramed in the chapter.Answer: Instead of the basic fixed-for-floating interest rate swap, there are also zero-coupon-for-floating rate swaps where the fixed rate payer makes only one zero-coupon payment at maturity on the notional value. There are also floating-for-floating rate swaps where each side is tied to a different floating rate index or a different frequency of the same index. Currency swaps need not be fixed-for-fixed; fixed-for-floating and floating-for-floating rate currency swaps are frequently arranged. Moreover, both currency and interest rate swaps can be amortizing as well as non-amortizing.7. If the cost advantage of interest rate swaps would likely be arbitraged away in competitive markets, what other explanations exist to explain the rapid development of the interest rate swap market?Answer: All types of debt instruments are not always available to all borrowers. Interest rate swaps can assist in market completeness. That is, a borrower may use a swap to get out of one type of financing and to obtain a more desirable type of credit that is more suitable for its asset maturity structure.8. Suppose Morgan Guaranty, Ltd. is quoting swap rates as follows: 7.75 - 8.10 percent annually against six-month dollar LIBOR for dollars and 11.25 - 11.65 percent annually against six-month dollar LIBOR for British pound sterling. At what rates will Morgan Guaranty enter into a $/£ currency swap?Answer: Morgan Guaranty will pay annual fixed-rate dollar payments of 7.75 percent against receiving six-month dollar LIBOR flat, or it will receive fixed-rate annual dollar payments at 8.10 percent against paying six-month dollar LIBOR flat. Morgan Guaranty will make annual fixed-rate £ payments at 11.25 percent against receiving six-month dollar LIBOR flat, or it will receive annual fixed-rate £ payments at 11.65 percent against paying six-month dollar LIBOR flat. Thus, Morgan Guaranty will enter into a currency swap in which it would pay annual fixed-rate dollar payments of 7.75 percent in return for receiving semi-annual fixed-rate £ payments at 11.65 percent, or it will receive annual fixed-rate dollar payments at 8.10 percent against paying annual fixed-rate £ payments at 11.25 percent.9. A U.S. company needs to raise €50,000,000. It plans to raise this money by issuing dollar-denominated bonds and using a currency swap to convert the dollars to euros. The company expects interest rates in both the United States and the euro zone to fall.a. Should the swap be structured with interest paid at a fixed or a floating rate?b. Should the swap be structured with interest received at a fixed or a floating rate?CFA Guideline Answer:a. The U.S. company would pay the interest rate in euros. Because it expects that the interest rate in the euro zone will fall in the future, it should choose a swap with a floating rate on the interest paid in euros to let the interest rate on its debt float down.b. The U.S. company would receive the interest rate in dollars. Because it expects that the interest rate in the United States will fall in the future, it should choose a swap with a fixed rate on the interest received in dollars to prevent the interest rate it receives from going down.*10. Assume a currency swap in which two counterparties of comparable credit risk each borrow at the best rate available, yet the nominal rate of one counterparty is higher than the other. After the initial principal exchange, is the counterparty that is required to make interest payments at the higher nominal rate at a financial disadvantage to the other in the swap agreement? Explain your thinking.Answer: Superficially, it may appear that the counterparty paying the higher nominal rate is at a disadvantage since it has borrowed at a lower rate. However, if the forward rate is an unbiased predictor of the expected spot rate and if IRP holds, then the currency with the higher nominal rate is expected to depreciate versus the other. In this case, the counterparty making the interest payments at the higher nominal rate is in effect making interest payments at the lower interest rate because the payment currency is depreciating in value versus the borrowing currency.PROBLEMS1. Alpha and Beta Companies can borrow for a five-year term at the following rates:Alpha BetaMoody’s credit rating Aa BaaFixed-rate borrowing cost 10.5% 12.0%Floating-rate borrowing cost LIBOR LIBOR + 1%a. Calculate the quality spread differential (QSD).b. Develop an interest rate swap in which both Alpha and Beta have an equal cost savings in their borrowing costs. Assume Alpha desires floating-rate debt and Beta desires fixed-rate debt. No swap bank is involved in this transaction.Solution:a. The QSD = (12.0% - 10.5%) minus (LIBOR + 1% - LIBOR) = .5%.b. Alpha needs to issue fixed-rate debt at 10.5% and Beta needs to issue floating rate-debt at LIBOR + 1%. Alpha needs to pay LIBOR to Beta. Beta needs to pay 10.75% to Alpha. If this is done, Alpha’s floating-rate all-in-cost is: 10.5% + LIBOR - 10.75% = LIBOR - .25%, a .25% savings over issuing floating-rate debt on its own. Beta’s fixed-rate all-in-cost is: LIBOR+ 1% + 10.75% - LIBOR = 11.75%, a .25% savings over issuing fixed-rate debt.2. Do problem 1 over again, this time assuming more realistically that a swap bank is involved as an intermediary. Assume the swap bank is quoting five-year dollar interest rate swaps at 10.7% - 10.8% against LIBOR flat.Solution: Alpha will issue fixed-rate debt at 10.5% and Beta will issue floating rate-debt at LIBOR + 1%. Alpha will receive 10.7% from the swap bank and pay it LIBOR. Beta will pay 10.8% to the swap bank and receive from it LIBOR. If this is done, Alpha’s floating-rate all-in-cost is: 10.5% + LIBOR - 10.7% = LIBOR - .20%, a .20% savings over issuing floating-rate debt on its own. Beta’s fixed-rate all-in-cost is: LIBOR+ 1% + 10.8% - LIBOR = 11.8%, a .20% savings over issuing fixed-rate debt.3. Company A is a AAA-rated firm desiring to issue five-year FRNs. It finds that it can issue FRNs at six-month LIBOR + .125 percent or at three-month LIBOR + .125 percent. Given its asset structure, three-month LIBOR is the preferred index. Company B is an A-rated firm that also desires to issue five-year FRNs. It finds it can issue at six-month LIBOR + 1.0 percent or at three-month LIBOR + .625 percent. Given its asset structure, six-month LIBOR is the preferred index. Assume a notional principal of $15,000,000. Determine the QSD and set up a floating-for-floating rate swap where the swap bank receives .125 percent and the two counterparties share the remaining savings equally.Solution: The quality spread differential is [(Six-month LIBOR + 1.0 percent) minus (Six-month LIBOR + .125 percent) =] .875 percent minus [(Three-month LIBOR + .625 percent) minus (Three-month LIBOR + .125 percent) =] .50 percent, which equals .375 percent. If the swap bank receives .125 percent, each counterparty is to save .125 percent. To affect the swap, Company A would issue FRNs indexed to six-month LIBOR and Company B would issue FRNs indexed three-month LIBOR. Company B might make semi-annual payments of six-month LIBOR + .125 percent to the swap bank, which would pass all of it through to Company A. Company A, in turn, might make quarterly payments of three-month LIBOR to the swap bank, which would pass through three-month LIBOR - .125 percent to Company B. On an annualized basis, Company B will remit to the swap bank six-month LIBOR + .125 percent and pay three-month LIBOR + .625 percent on its FRNs. It will receive three-month LIBOR - .125 percent from the swap bank. This arrangement results in an all-in cost of six-month LIBOR + .825 percent, which is a rate .125 percent below the FRNs indexed to six-month LIBOR + 1.0 percent Company B could issue on its own. Company A will remit three-month LIBOR to the swap bank and pay six-month LIBOR + .125 percent on its FRNs. It will receive six-month LIBOR + .125 percent from the swap bank. This arrangement results in an all-in cost of three-month LIBOR for Company A, which is .125 percent less than the FRNs indexed to three-month LIBOR + .125 percent it could issue on its own. The arrangements with the two counterparties net the swap bank .125 percent per annum, received quarterly.*4. A corporation enters into a five-year interest rate swap with a swap bank in which it agrees to pay the swap bank a fixed rate of 9.75 percent annually on a notional amount of €15,000,000 and receive LIBOR. As of the second reset date, determine the price of the swap from the corporation’s viewpoint assuming that the fixed-rate side of the swap has increased to 10.25 percent.Solution: On the reset date, the present value of the future floating-rate payments the corporation will receive from the swap bank based on the notional value will be €15,000,000. The present value of a hypothetical bond issue of €15,000,000 with three remaining 9.75 percent coupon payments at the newfixed-rate of 10.25 percent is €14,814,304. This sum represents the present value of the remaining payments the swap bank will receive from the corporation. Thus, the swap bank should be willing to buy and the corporation should be willing to sell the swap for €15,000,000 - €14,814,304 = €185,696.5. Karla Ferris, a fixed income manager at Mangus Capital Management, expects the current positively sloped U.S. Treasury yield curve to shift parallel upward.Ferris owns two $1,000,000 corporate bonds maturing on June 15, 1999, one with a variable rate based on 6-month U.S. dollar LIBOR and one with a fixed rate. Both yield 50 basis points over comparable U.S. Treasury market rates, have very similar credit quality, and pay interest semi-annually.Ferris wished to execute a swap to take advantage of her expectation of a yield curve shift and believes that any difference in credit spread between LIBOR and U.S. Treasury market rates will remain constant.a. Describe a six-month U.S. dollar LIBOR-based swap that would allow Ferris to take advantage of her expectation. Discuss, assuming Ferris’ expectation is correct, the change in the swap’s value and how that change would affect the value of her portfolio. [No calculations required to answer part a.] Instead of the swap described in part a, Ferris would use the following alternative derivative strategy to achieve the same result.b. Explain, assuming Ferris’ expectation is correct, how the following strategy achieves the same result in response to the yield curve shift. [No calculations required to answer part b.]Date Nominal Eurodollar Futures Contract ValueSettlement12-15-97 $1,000,00003-15-98 1,000,00006-15-98 1,000,00009-15-98 1,000,00012-15-98 1,000,00003-15-99 1,000,000c. Discuss one reason why these two derivative strategies provide the same result.CFA Guideline Answera.The Swap Value and its Effect on Ferris’ PortfolioBecause Karla Ferris believes interest rates will rise, she will want to swap her $1,000,000 fixed-rate corporate bond interest to receive six-month U.S. dollar LIBOR. She will continue to hold her variable-rate six-month U.S. dollar LIBOR rate bond because its payments will increase as interest rates rise. Because the credit risk between the U.S. dollar LIBOR and the U.S. Treasury market is expected to remain constant, Ferris can use the U.S. dollar LIBOR market to take advantage of her interest rate expectation without affecting her credit risk exposure.To execute this swap, she would enter into a two-year term, semi-annual settle, $1,000,000 nominal principal, pay fixed-receive floating U.S. dollar LIBOR swap. If rates rise, the swap’s mark-to-market value will increase because the U.S. dollar LIBOR Ferris receives will be higher than the LIBOR rates from which the swap was priced. If Ferris were to enter into the same swap after interest rates rise, she would pay a higher fixed rate to receive LIBOR rates. This higher fixed rate would be calculated as the present value of now higher forward LIBOR rates. Because Ferris would be paying a stated fixed rate that is lower than this new higher-present-value fixed rate, she could sell her swap at a premium. This premium is called the “replacement cost” value of the swap.b. Eurodollar Futures StrategyThe appropriate futures hedge is to short a combination of Eurodollar futures contracts with different settlement dates to match the coupon payments and principal. This futures hedge accomplishes the same objective as the pay fixed-receive floating swap described in Part a. By discussing how the yield-curve shift affects the value of the futures hedge, the candidate can show an understanding of how Eurodollar futures contracts can be used instead of a pay fixed-receive floating swap.If rates rise, the mark-to-market values of the Eurodollar contracts decrease; their yields must increase to equal the new higher forward and spot LIBOR rates. Because Ferris must short or sell the Eurodollar contracts to duplicate the pay fixed-receive variable swap in Part a, she gains as the Eurodollar futures contracts decline in value and the futures hedge increases in value. As the contracts expire, or if Ferris sells the remaining contracts prior to maturity, she will recognize a gain that increases her return. With higher interest rates, the value of the fixed-rate bond will decrease. If the hedge ratios are appropriate, the value of the portfolio, however, will remain unchanged because of the increased value of the hedge, which offsets the fixed-rate bond’s decrease.c. Why the Derivative Strategies Achieve the Same ResultArbitrage market forces make these two strategies provide the same result to Ferris. The two strategies are different mechanisms for different market participants to hedge against increasing rates. Some money managers prefer swaps; others, Eurodollar futures contracts. Each institutional marketparticipant has different preferences and choices in hedging interest rate risk. The key is that market makers moving into and out of these two markets ensure that the markets are similarly priced and provide similar returns. As an example of such an arbitrage, consider what would happen if forward market LIBOR rates were lower than swap market LIBOR rates. An arbitrageur would, under such circumstances, sell the futures/forwards contracts and enter into a received fixed-pay variable swap. This arbitrageur could now receive the higher fixed rate of the swap market and pay the lower fixed rate of the futures market. He or she would pocket the differences between the two rates (without risk and without having to make any [net] investment.) This arbitrage could not last.As more and more market makers sold Eurodollar futures contracts, the selling pressure would cause their prices to fall and yields to rise, which would cause the present value cost of selling the Eurodollar contracts also to increase. Similarly, as more and more market makers offer to receive fixed rates in the swap market, market makers would have to lower their fixed rates to attract customers so they could lock in the lower hedge cost in the Eurodollar futures market. Thus, Eurodollar forward contract yields would rise and/or swap market receive-fixed rates would fall until the two rates converge. At this point, the arbitrage opportunity would no longer exist and the swap and forwards/futures markets would be in equilibrium.6. Rone Company asks Paula Scott, a treasury analyst, to recommend a flexible way to manage the company’s financial risks.Two years ago, Rone issued a $25 million (U.S.$), five-year floating rate note (FRN). The FRN pays an annual coupon equal to one-year LIBOR plus 75 basis points. The FRN is non-callable and will be repaid at par at maturity.Scott expects interest rates to increase and she recognizes that Rone could protect itself against the increase by using a pay-fixed swap. However, Rone’s Board of Directors prohibits both short sales of securities and swap transactions. Scott decides to replicate a pay-fixed swap using a combination of capital market instruments.a. Identify the instruments needed by Scott to replicate a pay-fixed swap and describe the required transactions.b. Explain how the transactions in Part a are equivalent to using a pay-fixed swap.CFA Guideline Answera. The instruments needed by Scott are a fixed-coupon bond and a floating rate note (FRN).The transactions required are to:· issue a fixed-coupon bond with a maturity of three years and a notional amount of $25 million, and· buy a $25 million FRN of the same maturity that pays one-year LIBOR plus 75 bps.b. At the outset, Rone will issue the bond and buy the FRN, resulting in a zero net cash flow at initiation. At the end of the third year, Rone will repay the fixed-coupon bond and will be repaid the FRN, resulting in a zero net cash flow at maturity. The net cash flow associated with each of the three annual coupon payments will be the difference between the inflow (to Rone) on the FRN and the outflow (to Rone) on the bond. Movements in interest rates during the three-year period will determine whether the net cash flow associated with the coupons is positive or negative to Rone. Thus, the bond transactions are financially equivalent to a plain vanilla pay-fixed interest rate swap.7. A company based in the United Kingdom has an Italian subsidiary. The subsidiary generates €25,000,000 a year, received in equivalent semiannual installments of €12,500,000. The British company wishes to convert the euro cash flows to pounds twice a year. It plans to engage in a currency swap in order to lock in the exchange rate at which it can convert the euros to pounds. The current exchange rate is €1.5/£. The fixed rate on a plain vaninilla currency swap in pounds is 7.5 percent per year, and the fixed rate on a plain vanilla currency swap in euros is 6.5 percent per year.a. Determine the notional principals in euros and pounds for a swap with semiannual payments that will help achieve the objective.b. Determine the semiannual cash flows from this swap.CFA Guideline Answera. The semiannual cash flow must be converted into pounds is €25,000,000/2 = €12,500,000. In order to create a swap to convert €12,500,000, the equivalent notional principals are · Euro notional principal = €12,500,000/(0.065/2) = €384,615,385· Pound notional principal = €384,615,385/€1.5/£ = £256,410,257b. The cash flows from the swap will now be· Company makes swap payment = €384,615,385(0.065/2) = €12,500,000· Company receives swap payment = £256,410,257(0.075/2) = £9,615,385The company has effectively converted euro cash receipts to pounds.8. Ashton Bishop is the debt manager for World Telephone, which needs €3.33 billion Euro financing for its operations. Bishop is considering the choice between issuance of debt denominated in: ∙ Euros (€), or∙ U.S. dollars, accompanied by a combined interest rate and currency swap.a. Explain one risk World would assume by entering into the combined interest rate and currency swap.Bishop believes that issuing the U.S.-dollar debt and entering into the swap can lower World’s cost of debt by 45 basis points. Immediately after selling the debt issue, World would swap the U.S. dollar payments for Euro payments throughout the maturity of the debt. She assumes a constant currency exchange rate throughout the tenor of the swap.Exhibit 1 gives details for the two alternative debt issues. Exhibit 2 provides current information about spot currency exchange rates and the 3-year tenor Euro/U.S. Dollar currency and interest rate swap.Exhibit 1World Telephone Debt DetailsCharacteristic Euro Currency Debt U.S. Dollar Currency DebtPar value €3.33 billion $3 billionTerm to maturity 3 years 3 yearsFixed interest rate 6.25% 7.75%Interest payment Annual AnnualExhibit 2Currency Exchange Rate and Swap InformationSpot currency exchange rate $0.90 per Euro ($0.90/€1.00)3-year tenor Euro/U.S. Dollarfixed interest rates 5.80% Euro/7.30% U.S. Dollarb. Show the notional principal and interest payment cash flows of the combined interest rate and currency swap.Note: Your response should show both the correct currency ($ or €) and amount for each cash flow. Answer problem b in the template provided.Template for problem bc. State whether or not World would reduce its borrowing cost by issuing the debt denominated in U.S. dollars, accompanied by the combined interest rate and currency swap. Justify your response with one reason.CFA Guideline Answera. World would assume both counterparty risk and currency risk. Counterparty risk is the risk that Bishop’s counterparty will default on payment of principal or interest cash flows in the swap.Currency risk is the currency exposure risk associated with all cash flows. If the US$ appreciates (Euro depreciates), there would be a loss on funding of the coupon payments; however, if the US$ depreciates, then the dollars will be worth less at the swap’s maturity.b.0 YearYear32 Year1 YearWorld paysNotional$3 billion €3.33 billion PrincipalInterest payment €193.14 million1€193.14 million €193.14 million World receives$3.33 billion €3 billion NotionalPrincipalInterest payment $219 million2$219 million $219 million1 € 193.14 million = € 3.33 billion x 5.8%2 $219 million = $3 billion x 7.3%c. World would not reduce its borrowing cost, because what Bishop saves in the Euro market, she loses in the dollar market. The interest rate on the Euro pay side of her swap is 5.80 percent, lower than the 6.25 percent she would pay on her Euro debt issue, an interest savings of 45 bps. But Bishop is only receiving 7.30 percent in U.S. dollars to pay on her 7.75 percent U.S. debt interest payment, an interest shortfall of 45 bps. Given a constant currency exchange rate, this 45 bps shortfall exactly offsets the savings from paying 5.80 percent versus the 6.25 percent. Thus there is no interest cost savings by sellingthe U.S. dollar debt issue and entering into the swap arrangement.MINI CASE: THE CENTRALIA CORPORATION’S CURRENCY SWAPThe Centralia Corporation is a U.S. manufacturer of small kitchen electrical appliances. It has decided to construct a wholly owned manufacturing facility in Zaragoza, Spain, to manufacture microwave ovens for sale in the European Union. The plant is expected to cost €5,500,000, and to take about one year to complete. The plant is to be financed over its economic life of eight years. The borrowing capacity created by this capital expenditure is $2,900,000; the remainder of the plant will be equity financed. Centralia is not well known in the Spanish or international bond market; consequently, it would have to pay 7 percent per annum to borrow euros, whereas the normal borrowing rate in the euro zone for well-known firms of equivalent risk is 6 percent. Alternatively, Centralia can borrow dollars in the U.S. at a rate of 8 percent.Study Questions1. Suppose a Spanish MNC has a mirror-image situation and needs $2,900,000 to finance a capital expenditure of one of its U.S. subsidiaries. It finds that it must pay a 9 percent fixed rate in the United States for dollars, whereas it can borrow euros at 6 percent. The exchange rate has been forecast to be $1.33/€1.00 in one year. Set up a currency swap that will benefit each counterparty.*2. Suppose that one year after the inception of the currency swap between Centralia and the Spanish MNC, the U.S. dollar fixed-rate has fallen from 8 to 6 percent and the euro zone fixed-rate for euros has fallen from 6 to 5.50 percent. In both dollars and euros, determine the market value of the swap if the exchange rate is $1.3343/€1.00.Suggested Solution to The Centralia Corporation’s Currency Swap1. The Spanish MNC should issue €2,180,500 of 6 percent fixed-rate debt and Centralia should issue $2,900,000 of fixed-rate 8 percent debt, since each counterparty has a relative comparative advantage in their home market. They will exchange principal sums in one year. The contractual exchange rate for the initial exchange is $2,900,000/€2,180,500, or $1.33/€1.00. Annually the counterparties will swap debt service: the Spanish MNC will pay Centralia $232,000 (= $2,900,000 x .08) and Centralia will pay the Spanish MNC €130,830 (= €2,180,500 x .06). The contractual exchange rate of the first seven annual debt service exchanges is $232,000/€130,830, or $1.7733/€1.00. At maturity, Centralia and the Spanish MNC will re-exchange the principal sums and the final debt service payments. The contractual exchange rate of the final currency exchange is $3,132,000/€2,311,330 = ($2,900,000 + $232,000)/(€2,180,500 + €130,830), or $1.3551/€1.00.*2. The market value of the dollar debt is the present value of a seven-year annuity of $232,000 and a lump sum of $2,900,000 discounted at 6 percent. This present value is $3,223,778. Similarly, the market value of the euro debt is the present value of a seven-year annuity of €130,830 and a lump sum of €2,180,500 discounted at 5.50 percent. This present value is €2,242,459. The dollar value of the swap is $3,223,778 - €2,242,459 x 1.3343 = $231,665. The euro value of the swap is €2,242,459 - $3,223,778/1.3343 = -€173,623.。

CHAPTER 13、14、15EXCHANGE-RATE DETERMINATION1.Which of the following tends to cause the U.S. dollar to appreciate in value?a.An increase in U.S. prices above foreign pricesb.Rapid economic growth in foreign countriesc. A fall in U.S. interest rates below foreign levelsd.An increase in the level of U.S. income2.An appreciation in the value of the U.S. dollar against the British pound would tend to:a.Discourage the British from buying American goodsb.Discourage Americans from buying British goodsc.Increase the number of dollars that could be bought with a poundd.Discourage U.S. tourists from traveling to Britain3.A depreciation of the dollar refers to a (an):a.Fall in the dollar price of foreign currencyb.Increase in the dollar price of foreign currencyc.Loss of foreign-exchange reserves for the U.S.d.Intervention in the international money market4.An increase in the dollar price of other currencies tends to cause:a.U.S. goods to be cheaper than foreign goodsb.U.S. goods to be more expensive than foreign goodsc.Foreign goods to be more expensive to residents of foreign nationsd.Foreign goods to be cheaper to residents of the United States5.Over time, a depreciation in the value of a nation’s currency in the foreign exchange market willresult in:a. Exports rising and imports fallingb. Imports rising and exports fallingc. Both imports and exports risingd. Both imports and exports falling6.Suppose the exchange rate between the Japanese yen and the U.S. dollar is 100 yen per dollar. AJapanese stereo with a price of 60,000 yen will cost:a. $60b. $600c. $6,000d. None of the above7.Suppose that a Swiss watch that costs 400 francs in Switzerland costs $200 in the United States.The exchange rate between the franc and the dollar is:a. 2 francs per dollarb. 1 franc per dollarc. $2 per francd. $3 per franc8.Under a system of floating exchange rates, the Swiss franc would depreciate in value if which of thefollowing occurs?a. Price inflation in Franceb. An increase in U.S. real incomec. A decrease in the Swiss money supplyd. Falling interest rates in Switzerland9.The relationship between the exchange rate and the prices of tradable goods is known as the:a. Purchasing-power-parity theoryb. Asset-markets theoryc. Monetary theoryd. Balance-of-payments theory10.If the exchange rate between Swiss francs and British pounds is 5 francs per pound, then thenumber of pounds that can be obtained for 200 francs equals:a. 20 poundsb. 40 poundsc. 60 poundsd. 80 pounds11.Low real interest rates in the United States tend to:a. Decrease the demand for dollars, causing the dollar to depreciateb. Decrease the demand for dollars, causing the dollar to appreciatec. Increase the demand for dollars, causing the dollar to depreciated. Increase the demand for dollars, causing the dollar to appreciate12.High real interest rates in the United States tend to:a. Decrease the demand for dollars, causing the dollar to depreciateb. Decrease the demand for dollars, causing the dollar to appreciatec. Increase the demand for dollars, causing the dollar to depreciated. Increase the demand for dollars, causing the dollar to appreciate13.Assume that the United States faces an 8 percent inflation rate while no (zero) inflation exists inJapan. According to the purchasing-power-parity theory, the dollar would be expected to:a. Appreciate by 8 percent against the yenb. Depreciate by 8 percent against the yenc. Remain at its existing exchange rated. None of the above14.In the presence of purchasing-power parity, if one dollar exchanges for 2 British pounds and if aVCR costs $400 in the United States, then in Great Britain the VCR should cost:a. 200 poundsb. 400 poundsc. 600 poundsd. 800 pounds15.If wheat costs $4 per bushel in the United States and 2 pounds per bushel in Great Britain, then inthe presence of purchasing-power parity the exchange rate should be:a. $.50 per poundb. $1.00 per poundc. $2.00 per poundd. $8.00 per pound16. A primary reason that explains the appreciation in the value of the U.S. dollar in 2005 is:a. Large trade surpluses for the United Statesb. High inflation rates in the United Statesc. Lack of investor confidence in the U.S. monetary policyd. High interest rates in the United States17.When the price of foreign currency (i.e., the exchange rate) is below the equilibrium level:a. An excess demand for that currency exists in the foreign exchange marketb. An excess supply of that currency exists in the foreign exchange marketc. The demand for foreign exchange shifts outward to the rightd. The demand for foreign exchange shifts backward to the left18.When the price of foreign currency (i.e., the exchange rate) is above the equilibrium level:a. An excess supply of that currency exists in the foreign exchange marketb. An excess demand for that currency exists in the foreign exchange marketc. The supply of foreign exchange shifts outward to the rightd. The supply of foreign exchange shifts backward to the left19.For the United States, suppose the annual interest rate on government securities equals 8 percentwhile the annual inflation rate equals 4 percent. For Japan, suppose the annual interest rate on government securities equals 10 percent while the annual inflation rate equals 7 percent. These variables would cause investment funds to flow from:a. The United States to Japan, causing the dollar to depreciateb. The United States to Japan, causing the dollar to appreciatec. Japan to the United States, causing the yen to depreciated. Japan to the United States, causing the yen to appreciate20.Under a system of floating exchange rates, relatively low productivity and high inflation rates inthe United States result in:a. An increase in the demand for foreign currency, a decrease in the supply of foreigncurrency, and a depreciation in the dollarb. An increase in the demand for foreign currency, an increase in the supply of foreigncurrency, and an appreciation in the dollarc. A decrease in the demand for foreign currency, a decrease in the supply of foreign currency,and a depreciation in the dollard. A decrease in the demand for foreign currency, an increase in the supply of foreigncurrency, and an appreciation in the dollar21.Under a system of floating exchange rates, relatively high productivity and low inflation rates inthe United States result in:a. An increase in the demand for foreign currency, a decrease in the supply of foreigncurrency, and a depreciation in the dollarb. An increase in the demand for foreign currency, an increase in the supply of foreigncurrency, and an appreciation in the dollarc. A decrease in the demand for foreign currency, a decrease in the supply of foreign currency,and a depreciation in the dollard. A decrease in the demand for foreign currency, an increase in the supply of foreigncurrency, and an appreciation in the dollar22.Which example of market expectations causes the dollar to appreciate against the yen?Expectations that the U.S. economy will have:a. Faster economic growth than Japanb. Higher future interest rates than Japanc. More rapid money supply growth than Japand. Higher inflation rates than Japan23.Starting at the point of equilibrium between the money supply and the money demand, an increasein the domestic money supply causes the value of the home currency to:a. Depreciate relative to other currenciesb. Appreciate relative to other currenciesc. Not change relative to other currenciesd. None of the above24.Starting at the point of equilibrium between the money supply and the money demand, a decreasein the domestic money supply causes the value of the home currency to:a. Depreciate relative to other currenciesb. Appreciate relative to other currenciesc. Not change relative to other currenciesd. None of the above25.Starting at the point of equilibrium between the money supply and the money demand, an increasein the demand for money in the home country causes the value of the home currency to:a. Depreciate relative to other currenciesb. Appreciate relative to other currenciesc. Not change relative to other currenciesd. None of the above26.Starting at the point of equilibrium between the money supply and the money demand, a decreasein the demand for money in the home country causes the value of the home currency to:a. Depreciate relative to other currenciesb. Appreciate relative to other currenciesc. Not change relative to other currenciesd. None of the above27.Which theory of exchange-rate determination best views the foreign exchange market as beingsimilar to a stock exchange where future expectations are important?a. Balance-of-payments approachb. Purchasing-power-parity approachc. Asset-markets approachd. Monetary approach28.According to the purchasing-power-parity theory, the U.S. dollar maintains its purchasing-powerparity if it depreciates by an amount equal to the excess of:a. U.S. interest rates over foreign interest ratesb. Foreign interest rates over U.S. interest ratesc. U.S. inflation over foreign inflationd. Foreign inflation over U.S. inflation29.An exchange rate is said to __________ when its short-run response to a change in marketfundamentals is greater than its long-run response.a. Overshootb. Undershootc. Depreciated. Appreciate30.In the short run, exchange rates respond to market forces such as:a. Inflation ratesb. Expectations of future exchange ratesc. Investment profitabilityd. Government trade policy31.Long-run exchange rate movements are governed by all of the following except:a. National productivity levelsb. Consumer tastes and preferencesc. Rates of inflationd. Interest rate levels32.Suppose the exchange rate between the U.S. dollar and the Japanese yen is initially 90 yen perdollar. According to purchasing-power parity, if the price of traded goods rises by 10 percent in the United States and remains constant in Japan, the exchange rate will become:a. 72 yen per dollarb. 81 pen per dollarc. 99 yen per dollard. 108 yen per dollar33.Suppose the exchange rate between the U.S. dollar and the Japanese yen is initially 90 yen perdollar. According to purchasing-power parity, if the price of traded goods rises by 5 percent in the United States and 15 percent in Japan, the exchange rate will become:a. 72 yen per dollarb. 81 yen per dollarc. 99 yen per dollard. 108 yen per dollar34.Suppose that the yen-dollar exchange rate changes from 85 yen per dollar to 80 yen per dollar. Onecan say that the:a. Yen has appreciated against the dollar and the dollar has depreciated against the yenb. Yen has depreciated against the dollar and the dollar has appreciated against the yenc. Yen has appreciated against the dollar and the dollar has appreciated against the yend. Yen has depreciated against the dollar and the dollar has depreciated against the yen35.Given a floating exchange rate system an increase in __________ would cause the dollar toappreciate against the euro.a. U.S. labor costsb. The U.S. money supplyc. U.S. real incomed. U.S. real interest rates36.Under a system of floating exchange rates, China trade surplus against US would result in a(an):a. Rise in the dollar price of RMBb. Fall in the dollar price of RMBc. Rise in RMB price of the dollard. Unchanged RMB/dollar exchange rateTRUE-FALSE QUESTIONS1.T2.T3.T4. F5. F6.T7. F8. F9.T10.T11. F12. F13.T14. F15.T16. F17.T18. FT F 1. In a free market, the equilibrium exchange rate occurs at the point where the quantity demanded of a foreign currency equals the quantity of that currency supplied.T F 2. Under floating exchange rates, short-run exchange rates are primarily determined by national differences in real interest rates and shifting expectations of future exchangerates.T F 3. Under floating exchange rates, relatively low domestic interest rates tend to promote depreciation of a currency’s exchange v alue while relatively high domestic interestrates lead to currency appreciation.T F 4. Suppose expansionary monetary policy in the United States leads to interest rates falling to 2 percent while tight monetary policy in Switzerland leads to interest ratesrising to 8 percent. With floating exchange rates, the dollar would appreciate againstthe franc.T F 5. The purchasing-power-parity theory is used to predict exchange-rate movements in the short run.T F 6. According to the law of one price, identical goods should cost the same in all nations, assuming there are no shipping costs nor trade barriers.T F 7. The purchasing-power-parity theory predicts that if the U.S. inflation rate exceeds the Japanese inflation rate by 4 percent, the dollar’s exchange v alue will appreciate by 4percent against the yen.T F 8. Assume the initial yen/dollar exchange rate to be 100 yen per dollar. If the U.S.inflation rate is 2 percent and the Japanese inflation rate is 7 percent, the exchangerate should move to 105 yen per dollar according to the purchasing-power-paritytheory.T F 9. Assume the initial dollar/pound exchange rate to be $2 per pound. If the U.S.inflation rate is 8 percent and the U.K. inflation rate is 3 percent, the exchange rateshould move to $2.10 per pound according to the purchasing-power-parity theory.T F 10. Starting from the point of equilibrium between the money supply and money demand, if the Federal Reserve increases the money supply the dollar’s exchange value willdepreciate according to the monetary approach to exchange-rate determination.T F 11. Starting from the point of equilibrium between the money supply and money demand, if there occurs an increase in the money demand the dollar’s exchange value willdepreciate according to the monetary approach to exchange-rate determination.T F 12. Changes in market expectations have their greatest impact on exchange-rate changes over the long run as opposed to the short run.T F 13. According to the principle of exchange-rate overshooting, a short-run depreciation ofa currency is likely to be greater than a long-run depreciation of that currency.T F 14. According to exchange-rate overshooting, an appreciation of the Australian dollar is likely to be greater over a long time period than over a short time period.T F 15. A forward premium on the British pound serves as a rough benchmark of theexpected rate of appreciation in the pound’s spot rate.T F 16. A forward discount on Mexico’s peso serves as a rough benchmark of the expected appreciation in the peso’s spot rate.T F 17. Although the law of one price predicts that identical goods should cost the same in all nations, transportation costs and tariffs tend to prevent this prediction from actuallyoccurring.T F 18. If real interest rates decline in the United States relative to real interest rates abroad, the dollar’s exchange value will appreciate under a floating exchange-rate system.。

International Economics, 8e (Krugman) IIChapter 12 National Income Accounting and the Balance of Payments1) A country's gross national product (GNP) isA) the value of all final goods and services produced by its factors of production and sold on the market in a given time period.B) the value of all intermediate goods and services produced by its factors of production and sold on the market in a given time period.C) the value of all final goods produced by its factors of production and sold on the market in a given time period.D) the value of all final goods and services produced by its factors of production and sold on the market.E) the value of all final goods and services produced by its factors of production, excluding land, and sold on the market in a given time period.Answer: A2）The CA is equal toA) Y - (C - I + G).B) Y + (C + I + G).C) Y - (C + I + G).D) Y - (C + I - G).E) None of the above.Answer: A3）For open economies,A) S = I.B) S = I + CA.C) S = I - CA.D) S > I + CA.E) S < I + CA.Answer: B4）A U.S. citizen buys a newly issued share of stock in England, paying for his order with a check, which the British company deposits in its own U.S. bank account in New York. How is this transaction accounted for in the balance of payments?A) financial account, U.S. asset exportB) current account, U.S. service importC) current account, British good exportD) financial account, British asset importE) financial account, U.S. asset importAnswer: A5) The earnings of a Spanish factory with British owners areA) counted in Spain's GDP.B) are part of Britain's GNP.C) are counted in Britain's GDP.D) are part of Spain's GNP.E) Only A and B.Answer: E6）"The Balance of payments is always balanced." Discuss.Answer: True. Every international transaction automatically enters the balance of payments twice, once as a credit and once as a debit.Current account + financial account + capital account = 07) "The balance of payments accounts seldom balance in practice." Discuss. Answer: True. The main reasons are due to the fact that data collected or received from different sources may differ in coverage, accuracy, and timing. In addition, data on services are not reliable as well as data from the financial account. Moreover, accurate measurements of international interest and dividend receipts are particularly difficult.8）Fill in the following table:Answer:Chapter 13 Exchange Rates and the Foreign Exchange Market: An Asset Approach1）How many British pounds would it cost to buy a pair of American designer jeans costing $45 if the exchange rate is 1.80 dollars per British pound?A) 10 British poundsB) 25 British poundsC) 20 British poundsD) 30 British poundsE) 40 British poundsAnswer: B2) An appreciation of a country's currency,A) decreases the relative price of its exports and lowers the relative price of its imports.B) raises the relative price of its exports and raises the relative price of its imports.C) lowers the relative price of its exports and raises the relative price of its imports.D) raises the relative price of its exports and lowers the relative price of its imports.E) None of the above.Answer: D3) Which major actor is at the center of the foreign exchange market?A) corporationsB) central banksC) commercial banksD) non-bank financial institutionsE) None of the above.Answer: C4) What is the expected dollar rate of return on euro deposits with today's exchange rate at $1.10 per euro, next year's expected exchange rate at $1.166 per euro, the dollar interest rate at 10%, and the euro interest rate at 5%?A) 10%B) 11%C) -1%D) 0%E) None of the above.Answer: B5) What is the expected dollar rate of return on dollar deposits with today's exchange rate at $1.10 per euro, next year's expected exchange rate at $1.165 per euro, the dollar interest rate at 10%, and the euro interest rate at 5%?A) 10%B) 11%C) -1%D) 0%E) None of the above.Answer: A6）If the dollar interest rate is 10 percent, the euro interest rate is 6 percent, and the expected return on dollar depreciation against the euro is 4 percent, thenA) an investor should invest only in dollars.B) an investor should invest only in euros.C) an investor should be indifferent between dollars and euros.D) It is impossible to tell given the information.E) All of the above.Answer: C7）Discuss the effects of a rise in the interest rate paid by euro deposits on the exchange rate.Answer: There are two effects to consider. If we make the unrealistic assumption that the expected exchange rate will not change, then a rise in the interest rate paid by Euro deposits causes the dollar to depreciate. However, if the expected exchange rate were to rise, then the current exchange rate would also rise. (See figure 13-6 from the text.)8) Calculate the interest rate in the euro zone if interest parity condition holds, for the following 15 cases:Answer:Chapter 14 Money, Interest Rates, and Exchange Rates 1）Money includesA) currency.B) checking deposits held by households and firms.C) deposits in the foreign exchange markets.D) Both A and B.E) A, B, and C.Answer: D2）The aggregate money demand depends onA) the interest rate.B) the price level.C) real national income.D) All of the above.E) Only A and C.Answer: D3）Using a figure describing both the U.S. money market and the foreign exchange market, analyze the effects of a temporary increase in the European money supply on the dollar/euro exchange rate.Answer: An increase in the European money supply will reduce the interest rate on the euro and thus will cause the schedule of the expected euro return expresses in dollars to shift down, causing a reduction in the dollar/euro exchange rate, i.e., an appreciation of the U.S. Dollar. The euro depreciates against the dollar. The U.S. money demand and money supply are not going to be affected, and thus the interest rate in the U.S. will remain the same.4) A permanent increase in a country's money supplyA) causes a more than proportional increase in its price level.B) causes a less than proportional increase in its price level.C) causes a proportional increase in its price level.D) leaves its price level constant in long-run equilibrium.E) None of the above.Answer: C5）After a permanent increase in the money supply,A) the exchange rate overshoots in the short run.B）the exchange rate overshoots in the long run.C) the exchange rate smoothly depreciates in the short run.D) the exchange rate smoothly appreciates in the short run.E) None of the above.Answer: A6）"Although the price levels appear to display short-run stickiness in many countries, a change in the money supply creates immediate demand and cost pressures that eventually lead to future increase in the price level." Discuss.Answer: The statement is true. The pressures come from three main sources: excess demand for output and labor; inflationary expectations; and, raw material prices.7）The long run effects of money supply change:A) ambiguous effect on the long-run values of the interest rate or real output, a proportional change in the price level's long-run value in the opposite direction.B）proportional effect on the long-run values of the interest rate or real output, a proportional change in the price level's long-run value in the same direction.C) no effect on the long-run values of the interest rate or real output, a proportional change in the price level's long-run value in the same direction.D) no effect on the long-run values of the interest rate or real output, no change in the price level's long-run value.E) ambiguous effect on the long-run values of the interest rate or real output, A disproportional change in the price level's long-run value in the same direction. Answer: CChapter 15 Price Levels and the Exchange Rate in the Long Run1）Under Purchasing Power Parity,A) E$/E = PUS/PE.B) E$/E = PE/PES.C) E$/E = PUS + PE.D) E$/E = PUS - PE.E) None of the above.Answer: A2）Assuming relative PPP, fill in the table below:Answer:3) Under PPP (and by the Fisher Effect), all else equal,A) a rise in a country's expected inflation rate will eventually cause a more-than proportional rise in the interest rate that deposits of its currency offer in order to accommodate for the higher inflation.B) a fall in a country's expected inflation rate will eventually cause an equal rise in the interest rate that deposits of its currency offer.C) a rise in a country's expected inflation rate will eventually cause an equal rise in the interest rate that deposits of its currency offer.D) a rise in a country's expected inflation rate will eventually cause a less than proportional rise in the interest rate that deposits of its currency offer to accommodate the rise in expected inflation.E) None of the above.Answer: C4）Describe the chain of events leading to exchange rate determination for the following cases:(a) An Increase in U.S. money supply(d) Increase in growth rate of U.S. money supply(c) Increase in world relative demand for U.S. products(d) Increase in relative U.S. output supplyAnswer: Chain of events leading to exchange rate determination:∈/$E = ∈/$q × (P us /P E )Increase in U.S. money supply: Pus rises in proportion to the money supply; qremains the same. All dollar prices will rise (including dollar price of euro).Increase in growth rate of U.S. money supply: Inflation rate, dollar interest rate, Pus, E, rises in proportion to Pus.Increase in world relative demand for U.S. products: E falls, and q does as well. Increase in relative U.S. output supply: Dollar depreciates, lowers relative price of U.S. output, rise in q, effect on E is not clear since q and Pus work in opposite directions.5）Which of the following statements is the most accurate? A) Relative PPP is not a reasonable approximation to the data.B) Relative PPP is sometimes a reasonable approximation to the data but often performs poorly.C) Relative PPP is sometimes a reasonable approximation to the data. D) PPP is sometimes a reasonable approximation to the data.E) PPP is sometimes a reasonable approximation to the data but usually performs poorly.Answer: B6) Interest rate differences between countries depend onA) differences in expected inflation, but not on expected changes in the real exchange rate.B) differences in expected changes in the real exchange rate, but not on expected inflation.C) neither differences in expected inflation, nor on expected changes in the real exchange rate.D) differences in expected inflation and nothing else.E) differences in expected inflation, and on expected changes in the real exchange rate.Answer: E8) What is the real exchange rate between the dollar and the euro equal to? Answer: Let,∙ Real dollar/euro exchange rate = ∈/$q ∙Nominal exchange rate = ∈/$E∙ Price of an unchanging basket in US = Pus ∙ Price of an unchanging basket in Europe = PEThen,∈/$q= (∈/$E× P E)/PusA rise in the real dollar/euro exchange rate is called a real depreciation of the dollar against the euro, a fall in purchasing power of the dollar.A fall in the real dollar/euro exchange rate is called a real appreciation of the dollar against the euro, a rise in purchasing power of the dollar.Chapter 16 Output and the Exchange Rate in the Short Run1）A country's domestic currency's real exchange rate, q, is best described byA) the price of similar goods in the same market.B) the price of the domestic basket in terms of the foreign one.C) the price of a domestic basket.D) the price of the foreign basket in terms of the domestic basket.E) the price of different goods baskets in the same market.Answer: D2）Fill in the following table:Answer：3) How does a rise in real income affect aggregate demand?A) Y ↑implies Yd ↑implies Im ↑implies CA ↓implies AD ↓, but Y ↑implies Yd ↑implies C ↑implies AD ↑by moreB) Y ↑implies Yd ↑implies Im ↓implies CA ↓implies AD ↓, but Y ↑implies Yd ↑implies C ↑implies AD ↑by moreC) Y ↑implies Yd ↑implies Im ↑implies CA ↑implies AD ↑, and Y ↑implies Yd ↑implies C ↑implies AD ↑D) Y ↑implies Yd ↑implies Im ↑implies CA ↓implies AD ↓, but Y ↑implies Yd ↑implies C ↑implies AD ↑by lessE) Y ↑implies Yd ↑implies Im ↓implies CA ↓implies AD ↓, but Y ↑implies Yd ↑implies C ↑implies AD ↑by lessAnswer: A4）The aggregate demand for home input can be written as a function of:I. Real exchange rate.II. Government spending.III. Disposable income.A) I onlyB) III onlyC) I and IIID) II and IIIE) I, II, and IIIAnswer: E5) In the short-run, any rise in the real exchange rate, EP/P, will causeA) an upward shift in the aggregate demand function and a reduction in outputB) an upward shift in the aggregate demand function and an expansion of outputC) a downward shift in the aggregate demand function and an expansion of outputD) an downward shift in the aggregate demand function and a reduction in outputE) an upward shift in the aggregate demand function but leaves output intact Answer: B6) In the short-run, any fall in EP/P, regardless of its causes, will causeA) an upward shift in the aggregate demand function and an expansion of outputB) an upward shift in the aggregate demand function and a reduction in outputC) a downward shift in the aggregate demand function and an expansion of outputD) an downward shift in the aggregate demand function and a reduction in outputE) an upward shift in the aggregate demand function but leaves output intact Answer: D7) In the short-run, a temporary increase in the money supplyA) shifts the AA curve to the right, increases output and depreciates the currency.B) shifts the AA curve to the left, increases output and depreciates the currency.C) shifts the AA curve to the left, decreases output and depreciates the currency.D) shifts the AA curve to the left, increases output and appreciates the currency.E) shifts the AA curve to the right, increases output and appreciates the currency. Answer: A8）If the economy starts in long-run equilibrium, a permanent fiscal expansion will causeA) an increase in exchange rate, E.B) a decrease in exchange rate, E.C) an increase in output, Y.D) a decrease in output, Y.E) shifting of the AA curve up and to the right.Answer: BChapter 17 Fixed Exchange Rates and Foreign Exchange Intervention1) A central bank's international reserves includeA) any gold that it owns.B) any silver that it owns.C) any gold that it owns and foreign and domestic assets.D) any silver that it owns and foreign and domestic assets.E) only foreign and domestic assets.Answer: C2）A balance sheet for the central bank of Pecunia is shown below:Central Bank Balance SheetAssets LiabilitiesForeign assets $1,000 Deposits held by private banks $500Domestic assets $1,500 Currency in circulation $2,000Please write the new balance sheet if the bank sells $100 worth of foreign bonds for domestic currency.Answer:Central Bank Balance SheetAssets LiabilitiesForeign assets $900 Deposits held by private banks $500Domestic assets $1,500 Currency in circulation $1,9003）If the central bank does not purchase foreign assets when output increases but instead holds the money stock constant, can it still keep the exchange rate fixed at Eo? Please explain with the aid of a figure.Answer:No, the rise in output leads to an excess demand for money. If the central bank does not increase supply to meet this demand, the domestic interest rate would rise above the foreign rate, R*. This higher rate of return (and given expectations in the foreign exchange market) would cause the exchange rate to fall below Eo.4）Under fixed exchange rate, in general,A) the domestic and foreign interest rates are equal, R = R.B) R = R+ (Ee - E)/E.C) There is no relation between the fixed exchange rate and the interest rates both foreign and domestic.D) E is equal to one.E) None of the above.Answer: A5) A balance of payments crisis is best described asA) a sharp change in interest rates sparked by a change in expectations about the level of imports.B) a sharp change in foreign reserves sparked by a change in expectations about the future exchange rate.C) a sharp change in interest rates sparked by a change in expectations about the level of exports.D) a sharp change in foreign reserves sparked by a change in expectations about the level of imports.E) None of the above.Answer: B6) Use a figure to illustrate the ineffectiveness of monetary policy to spur on an economy under a fixed exchange rate.Answer:The initial equilibrium rests at point 1. If the central bank wishes to use monetary policy to increase output from Y1 to Y2, then they might buy domestic assets and shift the AA curve outward. However, the central bank must maintain a fixed exchange rate E0, so would have to sell foreign assets for domestic currency, returning the economy to point 1.7）Use a figure to explain the potential effectiveness of fiscal policy to spur on the economy under a fixed exchange rate.Answer:With an aim toward increasing output, the government could use fiscal policy to shift the DD curve outward. The central bank will have to take steps to maintain a fixed exchange rate E0, among the options is buying foreign assets with money, to shift the AA schedule outward until the equilibrium at point 3 is reached。

Reference Key:Chapter OneII.1 domestic and international trade 6个体业主经营2 centralized management 7有限/无限责任3 joint stock company 8 合资企业4 public limited company (plc) 9 （美）有限公司5 human resources manager 10 财务主任Chapter TwoII.1 paper-based means of communication2 电子邮件3 business letters4 客套结语5 blind carbon copy6 烦交行7 letterhead/heading 8 手书签名9 enclosure 10 内部通知/备忘录Chapter ThreeII.1 catalog2 最新价目表3 gross price4 离岸价5 (advertising) brochure6 估价书7 discount and commission 8 行业折扣9 on approval 10 询价III.1.I am one of the leading chain stores based in London and specialized in Chinese arts andcrafts.2.As a leading/major importer of refrigerators in Liaoning Province, China, I am particularlyinterested in your General Brand refrigerators and establishing business relations with you. 3.We were impressed by the wide s election of your electronic products that were displayed atyour stand on the Dalian Trade Fair. Would you please send your latest catalog and price lists, quoting the best/lowest FOB Dalian.4.We would appreciate it if you could enclose some samples of your materials whenreplying/with your reply letter.5.The Shenzhou University invites tenders from building contractors for the conversion of anold dormitory building into a student activities center. Tenders should be in by 25th April and will be studied on price and design offered/tendered.IV.1.Reply to Enquiry of May 82.for your letter of May 83.enclosing the catalog and price list of our new products4.We look forward to your initial/first order5.Yours faithfully,Chapter FourII.1 firm and non-firm offer2 接盘3 counter-offer4 销售认可书5 quick sales/fast turnover and/with6 月/季度帐单mall/low profit margins7 payment against documents 8 畅销9 supply from stock 10 脱销III.1.Thank you for your enquiry of 5 June in which you asked for our catalogue and the latest price-list quoting c.i.f. Shanghai.2.Thank you for your enquiry of 9 October about our products, and we are enclosing our currentprice-list. All the prices are quoted FOB.3.I am pleased to tell you that the products you are going to order can be supplied from stock and will have no trouble/problem in meeting your delivery dates.4.We have a wide selection of sweaters that will appeal to all ages of both sexes and will surely find a ready market.5.We regret to tell you that the brands you enquire about are out of stock and we cannot expect another delivery until three months later.6.We can assure you that this new type of electronic watches are not only good in quality, competitive in price, delicate in design and small in size, they are also supported by our three-year guarantee. We feel confident that they will enjoy an easy market in your place.7.As the market is fluctuating, the price quoted is firm 3 weeks only, after which it will be subject to an increase of 5%.8.All prices quoted are subject to a 25% trade discount, with additional quantity discount of 5%. IV.Letter One:1. Your counter offer2. is acceptable3. We are enclosing4. very much looking forward5. having the opportChaptery to work togetherLetter Two:1. have carefully reviewed your estimate2. sign this contract immediately3. the head office in Shanghai4. within the next 30 days5. feel free to contact this officeChapter FiveII.1 place an order for … with2 试定货3 order in assorted sized, colors and designs4 订货单册5 credit facilities6 不可撤销的信用证7 draw a draft for $2000 8 按期交货9 ten days after receipt of the order 10 按订单备货11 pack in five wooden cases 12 编号1-6III.1.If this order is completed to our satisfaction, it will be the first of many (orders) we will beplacing with you.2.Please find enclosed our order, No. BD405, for blouses in assorted sizes, colours and designs.If you don’t have the listed items in stock, please do not send substitutes in thei r place.3.The 20% trade discount you offered is below/lower than the average level given by Europeansuppliers, and we would like it reviewed in the near future.4.Your No. 3 order has been completed and loaded on board SS Orient, which sails this weekand should reach you in a week.5.Your order of 30 tea sets of crockery should be packed in five crates, five sets per crate, witheach piece individually wrapped in cotton. The packages/crates should be lined inside and marked outside with the names, the words ‘F ragile’, ‘C rockery’ and , ‘This side up’, and numbered 1~5.6.As we are completely out of stock of the raw material you required and it will be at least onemonth before we get our next delivery, we regret to tell you that we cannot accept your order.7.As we have full order books and our factory is closing for the one-week National Dayholidays, I am sorry to say that we must turn down your order.8.The discount you asked for is far more than we offer to any of our customers and we workon/rely on quick sales and small profits/a fast turnover and small profit margins, we cannot but decline/turn down your order.9.The 10 cases/crates loaded on SS Tianjin each measure 10 x 6 x 4 ft and weigh 100 lb. Theyare marked with “HANDLE WITH CARE” and a smiling face sign☺.10.The carpets and material should be wrapped in thick grease-proof paper which isreinforced at both ends to avoid wear by friction.Chapter SixII.1 business negotiation2 签订销售合同3 modify an L/C4 租用船位5 customs formalities6 银行议付7 import/export license 8 商业发票9 proforma invoice 10 装货单Chapter SevenII.1 central bank2 招商银行3 Hongkong and Shanghai Bank4 信托银行5 issuing bank6 业务往来行7 issuing credit cards 8 自动取款卡9 current account 10 支票账户11 interest rate 12 有价证券13 cross check 14 汇票III.1.A bank draft for ￡25,000 has been drawn on your bank on your account in favor of my company in payment of your invoice No. A10 of 6 March.2.We have pleasure in advising you that I have instructed my bank to credit ￡1,000 to your account with Bank of China, London in settlement of my invoice of No. 2 order.3.I am writing to ask if you could open a current account for me under the trade name of Daxing Co. Ltd, and I'll very much appreciate it if this can be done within this week.4.I'm writing for a loan of ￡10.000 to buy additional equipment to expand production, offering ￡5,000 in IBM ordinary shares and ￡5,000 in state treasure bonds as security.5.I sincerely apologize for my oversight in not realizing that I had a debt balance in my current account. In order to avoid a repetition and any overdraft, would you please have ￡10,000 transferred from my deposit account into my current account.6.Would you please arrange from next month for￡2000 to be transferred every month from my No.2 account to Mr. Green Smith's account with Bank of China, Dalian in payment of the rent for my company.7.Would you please find enclosed a draft for ￡3,000 drawn on you by Jingdezhen Pottery Export Company accompanied by the relevant shipping documents which will be released on acceptance. 8.Regret to find that the draft for ￡2,000 drawn on you in favor of us was returned to us from our bank marked 'Refer to Drawer'.IV.Chapter EightII.1 cash in advance2 记账结算3 negotiate an L/C4 开立信用证5 advising bank6 保兑信用证7 TT - Telegraphic Transfer 8 结清账款9 dishonor a draft 10 货款III.1.What do you think of the terms of payment?2.We hope you will accept D/P payment terms.3.What is your regular practice concerning terms of payment?4.We usually accept payment by irrevocable L/C, payment against documents.5.For large orders, we insist on payment by L/C.6.Your L/C must reach us 30 days before delivery.7.Thank you for your agreeing to open for us an irrevocable letter of credit for ￡20,000 in favor of London Electronic Company.8.Would you please draw on us at 60 days against the L/C we established which will be available/valid until July 2nd, and enclose with the draft the following documents.VI.500 boulevard Jobert 69000 LyonThe Accountant 8 July 2001Guy Lussac80 rue Gaspart-Andre69000 Lyon (Rhone)Dear SirL/C No. 340895/AGLWe are (1) ____acting______ on behalf of the Eastern Bank, London, and would like to (2)____inform______ you that the above documentary credit for 45,000 FF has been (3)____opened______ in your favour by your customers Mercury Data Ltd. The credit is (4)____valid______until 12 August and all bank (5) ___charges_______have been paid.Please bring the following (6) ___documents_______ to the above address:Air WaybillInvoice for full value of the sale c.i.f. LondonInsurance CertificateCertificate of OriginWould you also (7) ____draw______ a sight draft for the full amount of the invoice on us so that we can (8) ___settle_______ this account.Thank you in advance.Fours faithfullyPaul DiderotPaul DiderotDocumentary Credits ManagerV.BANK OF ENGLAND Southampton May 20, 1999NATIONAL TRUST AND SAVINGS ASSOCIATIO N(PLACE) (DA TE) Dear Sirs:Airmail an irrevocable Letter of Credit on the following termsWe request you to establish byand conditions:in favor of P. Marco Ltd., 62 Angela Bassini Street, Rome, 00189 ItalyNAME AND ADDRESSfor account of Joseph Smith & Sons, 52 Street, Southampton E8 4LGNAME AND ADDRESSup to the aggregate amount of US $50 000 available by drafts at sightcovering 100% invoice value of merchandise to be described in invoice as:Software AutoCAD in accordance with Purchase Order No. 66889 Documents required: ( Please indicate by placing “√” in applicable boxes)√Invoice in duplicateSpecial U.S. Customs Invoice√Marine and War Insurance Policy or Certificate in duplicateFull set of clean On Board Ocean √Railroad TruckBills of LadingNotifying Joseph Smith & Sons, 52 Street, Southampton E8 4LGShipment from Rome, Italy to Southampton, EnglandShipment latest June 20, 1999Partial Shipments Not allowedTransshipment Not allowedDrafts to be drawn and negotiated on or before July 15, 1999NAME OF APPLICANTJohn SmithJohn SmithTreasurerJoseph Smith & SonsChapter NineII.1 credit note2 应收账款3 under-charge4 未清账款5 extend credit6 收回债款7 make a third request for payment 8 深切理解困境9 non-recourse factoring 10 财务状况III.1. Thank you for pointing out the error in my July statement totaling $5,000, which was due to the fault in the computer programming. Now the mistake in the account has been corrected. I apologize once again for the oversight on our part.2 We sympathize with the problem you have been facing in clearing your balance of account, and would appreciate it very much if you could settle your account the soonest possible.3 As we have already allowed you as high a trade discount as 30%, and we deal on quick sales and small profit margins, we regret to say that we cannot agree to extend the credit for/to another month.4 As one of our principal customers has gone bankrupt / Because of the bankruptcy of one of our principal customers, who is unable to clear their account/balance with us, regrettably, we are not in a position to clear ours on due dates as specified in the contract.5 Your June account is still outstanding which should have been cleared a month ago, but we haven’t received either your draft or your explanation. Unless you settle your account before the end of this month, my solicitors will be instructed to start proceedings to recover the debt.6 Enclosed you will find the outstanding May account/statement which should have been cleared a month ago. Would you please instruct your bank to debit your account with HK$50000 and transfer it to my account with Hongkong and Shanghai Bank, Shanghai before the end of this month. After that my solicitor will have to take up the matter.IV.1. helping us2. had not been credited3. our apology for this error4. we sent to you Chapter TenKey:II.1 make a complaint about2 无理投诉3 file a claim with … on/for4 救正事情差错5 wrongly delivered consignment6 发现破碎开裂7 make an immediate inspection/examination 8 做出解释9 contact … for compensation 10 由…负责赔偿III.1.I’m writing to complain about the wrong delivery of my No. 3 order. Pl ease have an immediate inspection and inform us how you are going to handle the matter.2.Two packages were found lost in the consignment carried by the SS Tianjin and garments to the value of $20,000 were found stolen. You will find a list of the damaged and missing articles attached.3.The best solution is for you to return the wrong articles to me, freight / carriage forward, while I’ll send to you the replacements immediately, freight paid. Once again let me say how much I regret the inconvenience this has caused.4.We have inspected the articles you returned and made a laboratory analysis and comparison to find the difference remains within the permissible limits. In this case we think there is no reason for you to return the consignment.5.Unless you offer reasonable explanations and take the necessary remedial measures, the order will be canceled. If any serious loss results because of this, we will be taking legal action.IV.1. we are in receipt of2. did not conform to our agreement dated June 53. based on the wrong catalog4. the time for executing this agreement5. extend the time to6. with goods that conform to the agreement7. looking forward to your early reply/responseChapter ElevenKey:II.1 direct/indirect export2 外包合同3 sales representative4 独家代理5 consignment trade6 运输代理公司7 annual turnover 8 按佣金结算9 act as an agent 10 代售…的货物III.1.We are looking for a local company who are interested in sole agency and acting on our behalf in selling our goods and products.2.You will find that it is very profitable to represent us in handling our products as we offer a wide range of products which have attractive designs, best quality, reasonable in price, with first-class after-sales service and full guarantee for two years.3.We are a large import agency situated in Shanghai and dealing in industrial boilers. We ourselves have many contacts throughout China with established businesses who are in the market for your products.4.As an inducement to the agent we appoint, we are prepared to offer a 15% commission, plus a substantial advertising allowance. If sales are successful, we will extend your agency to cover the whole eastern area of the country.5.We expect manufacturers to offer us additional expenses of $50,000 per annum for any advertising that we think will help sell your products, plus advertising support in the form of brochures. In return we promise an annual sale of 3,000 motorcycles.6.The contract will be valid for one year effective as from 1 October, and will be renewed for a further year provided both parties agree by negotiation. Disputes if any should be settled through consultations.IV.COMMERCIAL AGENCY CONTRACTThis contract was made on the __third__day of ______May______, two thousand and __six__ between Mr. __John Smith___, representative of ____ ABC ______________________ Company (hereafter called the first Party) and Mr. ____Li Lin________ of _______XYZ________________Company (hereafter called the second Party). Whereas the first Party is willing to appoint the second party as the exclusive agent in the territory of _ the whole city of Dalian_ for selling the first Party’s plastic kitchenware. It is hereby mutually agreed as follows:1.The first Party shall supply the second Party with finished products of __ plastic kitchenware__. The second Party shall be responsible for the packing and labeling with the trade mark and labels the same as the original ones.2.The monthly sales of the second Party shall not be less than ___200___ sets/boxes.3.This contract shall be cancelled at any time should the second Party fail to meet the agreedsales quantity for ____six months______.4.Advertising expenses shall be borne by ____the second Party______.5.With the consent of both Parties, this contract shall be effective commencing from the date ofsigning, valid for __one year__ and renewable automatically for another year unless either party gives at least three months’ prior written notice of his intention to terminate the contract.6.This contract shall be made in __duplicate__, both in _English_ and _Chinese_, and eachParty shall keep one copy. In case of any discrepancies between the Chinese and the English copy, the ____English____ copy shall govern.7.This contract can be amended with both Parties’ consent.The first Party The second PartyChapter TwelveII.1 SS - Steam Ship2 航运船舶3 MV - Motor Vessel4 客货船5 general cargo ship6 集装箱船7 registered tonnage 8 发货人/托运人9 port of departure 10 接货地11 made to order and blank-endorsed 12 租船契约III.1.Would you please quote for collecting from my No.5 warehouse at the development zone andshipping to Tianjin a consignment of 100 computers packed in 10 wooden cases and measuring 60x40x20cm?2.The first available vessel sailing from Hong Kong to Amsterdam is the SS Orient, whichdeparts on 5 June and is due in Amsterdam on about 10 July. The vessel will stay here for 7 days and accept your No.5 consignment from 28 May. We shall handle all the shipping and insurance formalities / shipping formalities and insurance.3.I hope that the goods can be shipped promptly after you get our L/C.4.We are pleased to inform you that we have been able to secure a bulk ship for you to charter,which has a cargo capacity of fifty thousand tons and a speed of 20 knots and which will certainly meet your requirement of shipping iron ore from Australia to Shanghai.5.Shipment should be made before October, otherwise we are not able to catch the season.6.The order is so urgently required that we must ask you to expedite shipment.7.Please see to it that the goods are shipped by S.S. Tianshan sailing on or about October 15.8.The ship should be at the port of loading within 15 to 20 days after we have got the goodsready for shipment.IV.ShipperShenzhen Camera Developing Co., 21 Bagua 3rd Road, ShenzhenChina Ocean Shipping Company BILL OF LADINGORIGINALDIRECT OR WITH TRANSSHIPMENTB/L No. SCD 3-688ConsigneeTo Order of ShipperAtlantic Trade Co., Ltd. SanFrancisco, U.S.ANotifyAtlantic Trade Co., Ltd. SanFrancisco, U.S.AVesselBroadwayPort of loading Port of DischargeShekou, Shenzhen San FranciscoNationality The P. R. China Freight Payable at Shekou, ShenzhenParticulars Furnished by the ShipperMarks and Numbers No. of Packages Description of Goods Gross Weight Measurement SC-SAN-3500 cartons Digital Camera1,810kgs25m3Total packages (in words:) Five Hundred Cartons OnlyFreight and ChargeDated Oct 25, 2005 at ShenzhenWang Yikuan For the MasterChapter ThirteenII.1 the insured 2保险金额3 certificate of insurance4 仲裁裁定5 WPA6 平安险7 floating policy 8 预约保单9 insurance broker 10 赔偿和赔款III.1. What types of cover does your company usually undertake?2. If we conclude the business on a CIF basis, what cover will you take out for the goods?3. Who will pay the premium for the risk of breakage?4. As our present policy runs/expires/is due at the end of this month and we are not going to renew it with our former insurer who charges too high insurance rates, we would like to know if you could offer a comprehensive property insurance policy covering our premises along with fixtures and fittings against fire, flood, accident and theft. Our premises are valued at $2 million. No dangerous situations whatsoever have happened since the factory went into operation.5. Thank you for your enquiry of June 4 about the comprehensive property protection and we are pleased to inform you that the kind of insurance coverage you require is Policy A362 which covers against theft in addition to the coverage you mentioned, with the premium of 3‰.6. In reply to your letter of August 8 in which you asked about cover for a shipment of your consignment from this port to Shanghai, China, we are enclosing a cover note/proposal form which should be completed and sent to us by return of post.7. The survey report shows the loss as follows: 10 cases were missing and 5 cases were wetted whose contents can be sold at discounted prices. Therefore, we are prepared to offer you a partial compensation of $4,000 under the policy. Your earliest reply with acceptance will be appreciated.IV.T he People’s Insurance Company of ChinaHead Office: BEIJING Established in 1949Marine Cargo Transportation Insurance Policy Invoice No. SWT/3500298Policy No. TY36-20081 This Policy of Insurance witnesses that The People’s Insurance Company of China (hereinafter called “The Company”) at the request of Shanghai Textiles I/E Corp(hereinafter called “the Insured”) and in consideration of the agreed premium paid to the Company by the Insured, undertakes to insure the under-mentioned goods in transportation subject to the conditions of the Policy as per the Clauses printed overleaf and other special clauses attached hereon.MARKS & NOs. QUANTITY DESCRIPTIONS OFAMOUNT INSUREDGOODSN/M 4 CASES Garment USD 1 839.00Total amount insured USD 1 839.00Premium As arranged Rate As arranged Per conveyance S. S. S. S. Victory Sig. on or abt. Nov. 10, 2005 from Shanghai to Hong Kong Conditions All RisksThe People’s Insurance Company of China Claim payable at Hong Kong Wang PingDate Sept. 25, 2005Deputy Manager。

Chapter 14Forward interest rate(金融市场学)Chapter 14Forward interest rateForward interest ratesTopicsSpot and forward interest ratesSpot yield curveImplicit forward ratesYield curve shapesUnbiased-expectations hypothesisLiquidity-premium theoryLearning outcomesYou should be able to:Distinguish between spot and implicit forward ratesUnderstand that implicit forward rates can be found from money market yieldsExplain how expectations determine yield curve shapesExplain how risk premiums can influence the yield curve shapeSpot yieldsA spot yield is today’s rate that measures the growth in a future valueToday’s money market yields are spot interest ratesSingle (0r1) and multi-period (0r2) spot ratesTreating 30 days as a period, today’s 30-day rate is a single-periodspot rate, whereas the 60-day rate is a two-period spot rate Forward ratesA forward rate starts at a future dateThere are actual and implicit forward rates1>. Actual forward rates are usually found in futures marketsImplicit forward rates are derived from multi-period spot rates The single-period implicit forward rate (1r2) is found in the two-period rateIt is the second period rateImplicit forward rateFound from a two-period rate0r20r11r2Forward rateDeriving implicit forward ratesA multi-period spot rate is essentially an average rate of its constituent single-period rates:0r2 ?? 0.5(0r1 + 1r2)Hence1r2 ?? 2(0r2) - 0r1When 0r2 is 5.10% and 0r1 is 5.00%, the implicit forward rate is 5.20% Yield curvesA yield curve show s today’s interest rates as a function of the termA spot yield curve represents today’s money market yields accordingto termInverse curveNormal curver%TermExplaining yield curve shapesUnbiased-expectations hypothesisImplicit forward rates are determined by the expected movement in interest ratesIn the market, 0r2 will equal 0.5(0r1 + 1r2)normal curve slopes upward (0r2 &gt; 0r1)this occurs when 1r2 &gt; 0r1inverse curve slopes downward0r2 &lt; 0r1this occurs when 1r2 &gt; 0r1Liquidity-risk premiumThe liquidity-risk premium theory is based on the fact that holding-period investments face price riskCompare two ways of investing for 30 daysA 30-day security poses no price riskA 60-day security sold after 60 days does:Comparison of theoriesLiquidity premium theory suggests that longer-term securities will have higher yields to compensate investors for price risk when selling Explains normal curveExpectations theory explains curves of all shapes, they depend simply on the expected movement in interest rates。

C h a p t e r13:T h e B a l a n c e o f P a y m e n t sMultiple-choice Questions:1. Which of the following is false?A. A credit transaction leads to a payment from foreignersB. A debit transaction leads to a payment to foreigners*C. A credit transaction is entered with a negative signD. Double-entry bookkeeping refers to each transaction entered twice.2. Which of the following is a debit?A. The export of goodssterling balances in a London Bank, the U.S. debits its current account and credits its:A. official reserve accountB. unilateral transfers accountC. services in its current account*D. capital account8. When the U.S. ships food aid to a developing nation, the U.S. debits:*A. unilateral transfersB. servicesC. capitalD. official reserves9. When the resident of a foreign nation (1) sells a U.S. stock and (2) deposits the proceeds in a U.S. bank, the U.S.:A. credits capital for (1) and debits capital for (2)B. credits the current account and debits capitalC. debits capital and credits official reserves*D. debits capital for (1) and credits capital for (2)10. When a U.S. resident (1) purchases foreign treasury bills and pays by (2) drawing down his bank balances abroad,the U.S.:A. debits short-term capital and credits official reserves*B. debits capital for (1) and credits capital for (2)C. debits official reserves and credits capitalD. credits short-term capital and debits official reservesD. a net debit balance in the official reserve account refers to a surplus思考题：以2009年中美两国国际收支平衡表为例，分析两国国际经济交易呈现出哪些不同特征？战后美国出现大的贸易失衡，其原因和影响是什么？中国的外汇储备量世界第一，其原因是？有何利弊？Chapter 14: Foreign Exchange Markets and Exchange RatesMultiple-choice Questions:1. Which is not a function of the foreign exchange market?A. to transfer funds from one nation to anotherB. to finance trade*C. to diversify risksD. to provide the facilities for hedging2. An increase in the pound price of the dollar represents:*A. an appreciation of the dollarB. a depreciation of the dollarC. an appreciation of the poundD. a devaluation of the dollar3. A change from $1=€1 to $2=€1 represents*A. depreciation of the dollarB. an appreciation of the dollar*B. the covering of a foreign exchange riskC. foreign exchange speculationD. foreign exchange arbitrage9. A U.S. importer scheduled to make a payment of €100,000 in three months can hedgehis foreign exchange risk by:A. purchasing $100,000 in the forward market for delivery in three monthsB. selling €100,000 in the spot market for delivery in three months*C. purchasing €100,000 in the forward market for delivery in three monthsD. selling €100,000 in the spot market for delivery in three months10. If the three-month FR=$1/€1 and a speculator anticipates that SR=$1.02/€1 in threemonths, he can earn a profit by:A. selling euros forward*B. purchasing euros forwardC. selling dollars forwardD. purchasing dollars forward11. Destabilizing speculation refers to the:*A. sale of the foreign currency when the exchange rate falls or is lowB. purchase of the foreign currency when the exchange rate falls or is lowC. sale of the foreign currency when the exchange rate rises or is highD. all of the above12. A capital outflow from New York to Frankfurt under covered interest arbitrage can take place if the interest3. 如何看待以美国为首的国家要求人民币升值问题？4. 如何看待人民币国际化的前景？Chapter 15: Exchange Rate DeterminationMultiple-choice Questions:1. Which is correct with respect to the absolute PPP theory?A. It postulates that the exchange rate between two currencies is equal to the ratio of the price levels in the two nationsB. it does not take into consideration transportation costs or other obstructions to the flow of international tradeC. can be very misleading*D. all of the above2. The relative purchasing power-parity theory postulates that:A. The equilibrium exchange rate is equal to the ratio of the price level in the two nations*B. the change in the exchange rate over a period of time should be proportional to the relative change in the pricelevel in the two nations over the same time periodC. the change in the exchange rate over a period of time should be proportional to the absolute change in the pricelevel in the two nations over the same time periodD. the exchange rate at a period of time should be proportional to the relative prices in the two nations3. The relative PPP theory gives better results:*A. in the long run than in the short runB. when structural changes take placeC. the greater is the level of commodity aggregation8. According to the monetary approach to the balance of payments, a deficit in the nation's balance of payments resultsfrom:*A. an excess in the nation's stock of money supply that is not eliminated or corrected by the nation's monetaryauthoritiesB. an excess in the stock of money demanded in the nation that is not satisfied by domestic monetary authoritiesC. an excess in the stock of money demanded in the other nation that is not satisfied by the other nation's monetaryauthoritiesD. an excess of imports over exports in the nation9. If the increase in a nation's money supply grows less rapidly than its GNP, the nation will face a:A. once-and-for-all balance of payments deficitB. once-and-for-all balance of payments surplusC. continuous balance of payments deficit*D. continuous balance of payments surplus10. According to the monetary approach to the balance of payments a non-reserve currency nation:*A. has no control over its money supply in the long-run under fixed exchange ratesB. has no control over its money supply in the short-run under fixed exchange ratesC. has no control over its money supply in the long-run under flexible exchange ratesD. retains complete control over its money supply in the long-run11. According to the monetary approach to the balance of payments, a surplus nation will have to give up in the long-runits goal of:A. price stabilityresidents to increase the demand for the:A. domestic moneyB. domestic bond*C. foreign bondD. all of the above17. According to the portfolio balance approach, an increase in domestic real income or GDP leads domestic residents toincrease the demand for the:*A. domestic moneyB. domestic bondC. foreign bondD. all of the above18. According to the portfolio balance approach, an increase in domestic wealth leads domestic residents to increase thedemand for the:A. domestic moneyB. domestic bondC. foreign bond*D. all of the above19. Which of the following is false with regard to exchange rate dynamics:A. seeks to explain exchange rate fluctuations over time*B. results because the real sector adjusts instantaneously to disturbancesC. in the short run, the exchange rate overshoots its long-run equilibrium*B. smaller is the devaluation or depreciation required to correct a deficit of a given size in the nation's balance ofpaymentsC. less feasible is a flexible exchange rate systemD. less feasible is a devaluation as a policy to correct a deficit in the nation's balance of payments2. A nation's demand curve for foreign exchange is derived from the:A. foreign demand curve for the nations' exportsB. nation's supply curve of exports*C. domestic demand curve for imports and the foreign supply curve for the nation's importsD. foreign demand curve and the domestic supply curve for the nation's exports3. A depreciation of a nation's currency shifts:A. down its supply curve of imports in terms of the foreign currencyB. up its demand curve of imports in terms of the foreign currency*C. down its demand curve of imports in terms of the foreign currencyD. down its demand curve of imports in terms of the domestic currency4. When a nation's demand curve for imports in terms of the foreign currency is vertical:*A. the nation's demand curve for the foreign currency has zero elasticityB. the nation's demand for the currency is elasticC. the nation's supply of the currency is verticalD. the other nation's demand for the nation's currency has zero elasticity5. A depreciation of a nation's currency shifts:A. down its supply curve of exports in terms of the domestic currencypositively inclinedB. the supply curve of foreign exchange is negatively inclined and less elastic than the demand curveC. the sum of the absolute values of the elasticity of the nation's demand of imports and the foreign demand for thenation's exports is greater than one*D. all of the above11. The United States has a trade problem with Japan because the U.S. trade deficit with Japan:A. is very largeB. has persisted for a long timeC. did not seem to decline when the dollar depreciated sharply with respect to the yen*D. all of the above12. The mint parity refers to the:A. gold export pointB. gold import pointC. equilibrium exchange rate*D. ratio of the price of a unit of gold in terms of the currency of two nations13. Under the gold standard:A. each nations defines the price of gold in terms of its currency and then stands ready to buy and sell any amount ofgold at that priceB. there is a fixed relationship between any two currencies called the mint parityC. the exchange rate is determined by demand and supply between the gold points and is prevented from movingoutside the gold points by gold shipmentsB. all prices, wages, and interest rates are constantC. the nation operates at less than full employment*D. all of the above2. The marginal propensity to consume measures:A. the ratio of imports to incomeB. the ratio of income to imports*C. the change in imports over the change in incomeD. the change in income over the change in imports3. The income elasticity of imports is given by:A. the percentage change in income over the percentage change in importsB. the change in imports over the change in income*C. the marginal propensity to import over the average propensity to importD. the average propensity to import over the marginal propensity to import4. The equilibrium level of national income in an open economy is given by:A. I + X = S + MB. X - M = S - IC. I + (X-M) = S*D. all of the above5. If MPS=0.2 and MPM=0.3, the foreign trade multiplier is:A. 5B. 3.3C. 3B. with foreign repercussions for an autonomous increase in nation 1's X that replace domestic production in nation 2*C. with foreign repercussions for an autonomous increase in I in nation 1D. with foreign repercussions for an autonomous increase in I in nation 211. By itself, the automatic income adjustment mechanism is likely to bring about:*A. incomplete adjustmentB. complete adjustmentC. perverse adjustmentD. any of the above12. A depreciation of a deficit nation's currency from a condition of full employment:*A. may improve the nation's trade balanceB. will improve the nation's trade balanceC. will leave the nation's trade balance unchangedD. will cause a deterioration in the nation's trade balance13. The improvement in a nation's balance of trade and payments resulting from a depreciationof its currency is:A. reinforced by the induced fall in imports*B. partly neutralized by the induced rise in importsC. partly neutralized by the induced fall in importsD. any of the above.14. In the real world, the automatic income, price, and interest adjustment mechanisms, ifallowed to operate, are likely to:D. an equitable distribution of income2. In order to achieve internal and external balance simultaneously, a nation must usually use at least:A. one policy*B. two policiesC. three policiesD. cannot say3. Points below internal balance line YY in the Swan diagram indicate:A. a balance of payments deficitB. a balance of payments surplus*C. unemploymentD. inflation4. To correct a balance of payments deficit and unemployment a nation requires a:A. devaluation and expansionary fiscal and monetary policiesB. devaluation and contractionary fiscal and monetary policies*C. devaluation and either expansionary or contractionary fiscal and monetary policiesD. revaluation and either expansionary or contractionary fiscal and monetary policies5. To correct a balance of payments deficit and inflation a nation requires a:A. devaluation and expansionary fiscal and monetary policiesB. devaluation and contractionary fiscal and monetary policies*C. devaluation or revaluation and contractionary fiscal and monetary policiesD. revaluation and either expansionary or contractionary fiscal and monetary policies6. To correct a balance of payments surplus and unemployment a nation requires a:full employment level of national income the nation's BP curve is:*A. above the LM curveB. below the LM curveC. steeper than the LM curveD. above the IS curve12. In a world of perfectly elastic international capital flows and fixed exchange rates:A. fiscal policy is completely ineffective*B. monetary policy is completely ineffectiveC. both fiscal and monetary policies are completely ineffectiveD. both fiscal and monetary policies are effective13. To correct unemployment and a balance of payments deficits with flexible exchange rates and imperfect capitalmobility:A. both fiscal and monetary policies are requiredB. fiscal policy is requiredC. monetary policy is required*D. either monetary or fiscal policy is required14. To correct a balance of payments surplus and inflation a nation requires:A. expansionary fiscal policy and easy monetary policyB. contractionary fiscal policy and tight monetary policy*C. contractionary fiscal policy and easy monetary policyD. expansionary fiscal policy and tight monetary fiscal policy根据IB曲线和使D. all of the above2. The aggregate demand curve (AD) for closed economy is derived from theA. IS curveB. LM curveC. FE curve*D. IS and LM curves3. A reduction in the general price level with a constant money supply is shown by aA. leftward shift in the LM curve*B. movement down along a given aggregate demand curveC. rightward shift in the aggregate supply curveD. a rightward shift in the IS curve4. An increase in the money supply with constant prices leads to aA. leftward shift in the LM curveB. movement along a given aggregate demand curve*C. rightward shift in the aggregate demand curveD. rightward shift in the IS curve5. An increase in government expenditures leads toA. a rightward shift in the IS curveB. a rightward shift in the AD curveC. an increase in the level of national income*D. all of the above6. A nation's output in the short-run canaggregate demand curve to*A. shift to the rightB. shift to the leftC. remain unchangedD. any of the above12. An autonomous short-term capital outflow under flexible exchange rates causes the nation's aggregate demand curveto*A. shift to the rightB. shift to the leftC. remain unchangedD. any of the above13. With high short-term international capital flows, fixed exchange rates, and flexible pricesA. monetary policy is effective*B. fiscal policy is effectiveC. both fiscal and monetary policies are effectiveD. neither fiscal policy nor monetary policies are effective14. Which of the following statements is false?A. expansionary fiscal or monetary policy can increase the nation's output temporarily above its natural levelB. expansionary fiscal or monetary policy can used to correct a recession but only at the expense of higher prices in thenation*C. a recession cannot be eliminated automatically even if domestic prices are flexible downward。

货币银行学名词解释Chapter2: An Overview of the Financial System一级市场：筹集资金的公司或政府机构将其新发行的股票或债券等证券销售给最初购买者的金融市场。

Primary market:A financial market in which new issues of a security are sold to initial buyers by the corporation or government agency borrowing the funds.二级市场：交易已经发行的证券的金融市场。

Secondary market:A financial market in which securities that have been previously issued can be resold.场外市场：二级市场的一种组织形态，即分处各地的拥有证券存货的交易商随时向与它们联系并愿意接受它们报价的人在柜台上买卖证券。

Over-the-counter (OTC) market: A method of organizing a secondary market in which dealers at different locations who have an inventory of securities stand ready to buy and sell securities “over-the-counter” to anyone who comes to them and is willing to accept their prices.货币市场：交易短期债务工具（通常原始期限为1年以下）的金融市场。

Money market:A financial market in which only short-term debt instruments (generally those with original maturity of less than one year) are traded.资本市场：交易长期债务工具（通常原始期限在1年或1年以上）与股权工具的金融市场。