1-8章习题答案

SUGGESTED SOLUTIONS TO CHAPTER 2 PROBLEMS1. On August 1, 2006, Zimbabwe changed the value of the Zim dollar from Z$101/U.S.$ toZ$250/U.S.$.1.a. What was the original U.S. dollar value of the Zim dollar? What is the new U.S. dollar valueof the Zim dollar?A NSWER. The U.S. dollar value of the Zim dollar prior to devaluation was $0.0099 (1/101). Subsequent to devaluation, the Zim dollar was worth $0.004 (1/250).1.b. By what percent has the Zim dollar devalued (revalued) relative to the U.S. dollar?A NSWER. The U.S. dollar value of the Zim dollar has changed by (0.004 - 0.0099)/0.0099 = -59.6%. Thus, the Zim dollar has devalued by 24% against the U.S. dollar.1.c. By what percent has the U.S. dollar appreciated (depreciated) relative to the Zim dollar?A NSWER. The U.S. dollar has appreciated against the Zim dollar by an amount equal to (250 - 101)/101 = 147.5%.2. In 2002, one dollar bought ¥125. In 2006, it bought about ¥115.2.a. What was the dollar value of the yen in 2005? What was the yen’s dollar value in 2006?A NSWER. The dollar value of the yen in 2002 was $0.008 (1/125). By 2006, the yen had risen to $0.0087.2.b. By what percent has the yen risen in value between 2002 and 2006?A NSWER. Between 2002 and 2006, the yen rose by 8.8%, calculated as (0.0087 - 0.008)/0.008.2.c. By what percent has the dollar fallen in value between 2002 and 2006?A NSWER. During this same period, the dollar depreciated by 8%, calculated as (115 - 125)/125.3. On February 1, the euro is worth $1.2966. By May 1, it has moved to $1.3634.3.a. By how much has the euro appreciated or depreciated against the dollar over this 3-monthperiod?A NSWER. Since the euro is now worth more in dollar terms, it has appreciated against the dollar. The amount of euro appreciation is (1.3634 - 1.2966)/1.2966 = 5.15%.1. 3.b. By how much has the dollar appreciated or depreciated against the euro over this period?A NSWER. The flip side of euro appreciation is dollar depreciation. The dollar has depreciated by an amount equal to [(1/1.3634) – (1/1.2966)]/(1/1.2966) = -4.9%2. 4. In early August 2002 (the exact date is a state secret), North Korea reduced the officialvalue of the won from $0.465 to $0.0067. The black market value of the won at the time was $0.005.14.a. By what percent did the won devalue?ANSWER. Using Equation 2.1, the won devalued ($0.067-$0.465)/$0.465) = 98.56%3. 4.b. Following the initial devaluation what further percentage devaluation would benecessary for the won to equal its black market value?ANSWER. 25.4%4. 5. On March 29, 2007, the Indian rupee (Rs) was worth $0.023270. The next day, it wasworth $0.022980.235.a. By how much has the rupee devalued against the dollar?A NSWER . Using Equation 2.1, the rupee devalued by (0.02298 - 0.02327)/0.02327, or -1.25%.5.b. By how much has the dollar appreciated against the rupee?A NSWER . Using Equation 2.2, the dollar appreciated against the rupee by[(1/0.02298) - (1/0.02327)]/(1/0.02327), or 1.262%.6. On June 14, 2001, Domingo Cavallo, Argentina’s treasury secretary announced a new exchangerate policy designed to stimulate Argentina’s slumping economy. Under the new policy, exporters and importers would be able to convert between dollars and pesos at an exchange rate that was an average of the dollar and the euro exchange rates, that is, P1 = $0.50 + €0.50. At that time, the euro was trading at $0.85.6.a. How many pesos would an exporter receive for one dollar under the new system?A NSWER . Under the new system, P1 = $0.50 + €0.50 = $0.50 + $0.85/2 = $0.925. The peso value of a dollar is thus 1/0.925, or $1 = P1.081. This exchange rate is equivalent to dollar appreciation of 8.1% against the peso.6.b. How many dollars would an importer receive for one peso under the new system?A NSWER . As shown in the answer to Part a, P1 = $0.925. This exchange rate is equivalent to peso devaluation against the dollar of 7.5%.SUGGESTED SOLUTIONS TO CHAPTER 3 PROBLEMS1. During the currency crisis of September 1992, the Bank of England borrowed DM33 billionfrom the Bundesbank when a pound was worth DM2.78, or $1.912. It sold these DM in the foreign exchange market for pounds in a futile attempt to prevent a devaluation of the pound. It repaid these DM at the post-crisis rate of DM2.50:£1. By then, the dollar:pound exchange rate was $1.782:£1.1.a. By what percentage had the pound sterling devalued in the interim against the DM? Againstthe dollar?A NSWER . During this period, the pound depreciated by 10.1% against the pound and by 6.8% against the dollar.10.1%- = 2.782.78 2.50− 1.b. What was the cost of intervention to the Bank of England in pounds? In dollars?A NSWER . The Bank of England borrowed DM 33 billion and must repay DM33 billion. When it borrowed these DM, the DM was worth £0.3597, valuing the loan at £11.87 billion (DM33 billion *0.3597). After devaluation, the DM was worth £0.4000. Hence, the Bank of England’s cost of repaying the DM loan was £13.20 billion (DM33 billion * 0.4), a rise of £1.33 billion. Thus, the cost to the Bank of England of this DM borrowing and intervention was £1.33 billion.In dollar terms, intervention cost the Bank of England $825 million. This estimate is based on the difference of $0.025 between the DM’s initial value of $0.6878 (1.912/2.78) and its ending value of $0.7128 (1/2.50) times the DM33 billion borrowed and spent defending the pound. Specifically, the cost calculation is $0.025 * 33,000,000,000 = $825 million.2. Suppose the central rates within the ERM for the French franc and DM are FF 6.90403:ECU 1and DM 2.05853:ECU 1, respectively.2.a. What is the cross-exchange rate between the franc and the DM?A NSWER. Since things equal to the same thing are equal to each other, FF 6.90403 = DM2.05853. Hence, FF1 = DM2.05853/6.90403 = DM0.298164. Equivalently, DM 1 = FF6.90403/2.05853 = FF3.35386.2.b. Under the original 2.25% margin on either side of the central rate, what were theapproximate upper and lower intervention limits for France and Germany?A NSWER. Given the answer to part a, the French franc could rise to approximately DM0.298164 * 1.0225 = DM0.304872 or fall as far as DM0.298164 * 0.9775 = DM0.291455. Similarly, the upper limit for the DM is FF3.42933 and the lower limit is FF3.27840.2.c. Under the revised 15% margin on either side of the central rate, what are the currentapproximate upper and lower intervention limits for France and Germany?A NSWER. Given the answer to part a, the French franc could rise to approximately DM0.298164 * 1.15 = DM0.342888 or fall as far as DM2.98164 * 0.85 = DM 0.253439. Similarly, the upper limit for the DM is FF3.85694 and the lower limit is FF2.85078.3. A Dutch company exporting to France has FF3 million due in 90 days. Suppose that the currentexchange rate is FF1 = Dfl0.3291.3.a. Under the exchange rate mechanism, and assuming central rates of FF6.45863/ECU andDFl2.16979/ECU, what is the central cross-exchange rate between the two currencies?A NSWER. Given central rates of DFl2.16979:ECU and FF6.45863:ECU for the Dutch guilder and French franc, respectively, the central cross rate between the two currencies is DFl1 = FF2.97662 (6.45863/2.16979). Equivalently, FF1 = DFl0.335952 (2.16979/6.45863).3.b. Based on the answer to part a, what is the most the Dutch company could lose on its Frenchfranc receivable, assuming that France and the Netherlands stick to the ERM with a 15% band on either side of their central cross rate?A NSWER. At worst, the French franc can fall by 15% relative to its central guilder cross rate, to a cross-exchange rate of FF1 = DFl0.285559 (0.335952 * 0.85). Since the current exchange rate is FF 1 = DFl 0.3291, the most the Dutch company can lose on its FF 3 million receivable is 3,000,000 * (0.3291 - 0.285559) = DFl130,622.43.c. Redo part b, assuming the band was narrowed to 2.25%.A NSWER. If the band were narrowed to 2.25%, then the minimum value for the French franc would be DFl0.328393 and the maximum loss that the Dutch company could sustain would be 3,000,000 * (0.3291 - 0.328393) = DFl2,121.3.d. Redo part b, assuming you know nothing about the current cross-exchange rate.A NSWER. Knowing nothing about the current cross-exchange rate, the worst that could happen is that the cross rate would be at its upper bound of DFl0.386345 (0.335952 * 1.15) and it falls to its lower bound of 0.285559 (established in the answer to part b). In this case, the maximum possible loss is 3,000,000 * (0.386345 - 0. 285559) = DFl302,357.4. Panama adopted the U.S. dollar as its official paper money in 1904. Currently, about $400million to $500 million in U.S. dollars is circulating in Panama. If interest rates on U.S.Treasury securities are 7%, what is the value of the seigniorage that Panama is forgoing by using the U.S. dollar instead of its own-issue money?A NSWER. Instead of using U.S. dollars as its currency in circulation, the Panamanian government could substitute its own currency and invest the $400 million to $500 million in U.S. Treasury securities. This policy would earn the Panamanian government $28 million to $35 million annually at the current 7% interest rate. Thus, the Panamanian government is foregoing seigniorage worth $28 million to $35 million annually. The present value of this seigniorage equals the amount of U.S. dollars in circulation, or $400 million ($28 million/.07) to $500 million ($35 million/.07).5. By some estimates, $185 billion to $260 billion in currency is held outside the U.S.5.a. What is the value to the U.S. of the seigniorage associated with these overseas dollars?Assume that dollar interest rates are about 6%.A NSWER. The annual value of seigniorage equals the foregone interest on the currency held outside the U.S. Based on the numbers presented in the question, this annual value varies between $11.1 billion (0.06 * $185 billion) and $15.6 billion (0.06 * $260 billion). If this money stays overseas permanently, then the value of seigniorage is just equal to the amount of dollars held outside the U.S., or $185 billion to $260 billion. In other words, the U.S. receives goods and services worth this amount of money from foreigners and paid for them with pieces of green paper that are never redeemed for U.S. goods and services.5.b. Who in the United States realizes this seigniorage?A NSWER. The U.S. government realizes this seigniorage. Who in the U.S. benefits from this seigniorage is an issue in political economy and depends what the government does with the money: cuts taxes, spends it (which raises the further question of on whom), uses it to reduce the deficit, etc.SUGGESTED SOLUTIONS TO CHAPTER 4 PROBLEMS1.From base price levels of 100 in 2000, Japanese and U.S. price levels in 2006 stood at 98 and 109,respectively.1.a. If the 2000 $:¥ exchange rate was $0.00928, what should the exchange rate be in 2006?5A NSWER. If e2006 is the dollar value of the yen in 2006, then according to PPP:e2003/0.00928 = 109/98, or e2006 = $0.0103.1.b. In fact, the exchange rate in 2006 was ¥1 = $0.00860. What might account for the discrepancy?(Price levels were measured using the consumer price index.)A NSWER. The discrepancy between the predicted rate of $0.0103 and the actual rate of $0.0086 could be due to mismeasurement of the relevant price indices. Estimates based on narrower price indices reflecting only traded goods prices would probably be closer to the mark. Alternatively, it could be due to a switch in investors’ preferences from dollar to non-dollar assets.2. Two countries, the U.S. and England, produce only one good, wheat. Suppose the price of wheatis $3.25 in the U.S. and is £1.35 in England.2.a. According to the law of one price, what should the $:£ spot exchange rate be?A NSWER. Since the price of wheat must be the same in both nations, the exchange rate, e, is 3.25/1.35 ore = $2.4074.2.b. Suppose the price of wheat over the next year is expected to rise to $3.50 in the U.S and to£1.60 in England. What should the one-year $:£ forward rate be?A NSWER. In the absence of uncertainty, the forward rate, f, should be 3.50/1.60, or f = $2.1875.2.c. If the U.S. government imposes a tariff of $0.50 per bushel on wheat imported from England,what is the maximum possible change in the spot exchange rate that could occur?A NSWER. If e is the exchange rate, then wheat selling in England at £1.35 will sell in the U.S. for 1.35e +0.5, where 0.5 is the U.S. tariff on English wheat. To eliminate the possibility of arbitrage, 1.35e + 0.5 must be greater than or equal to $3.25, the price of wheat in the U.S. or e > $2.0370. Thus, the maximum exchange rate change that could occur is (2.4074 - 2.0370)/2.4074 = 15.38%. This solution assumes that the pound and dollar prices of wheat remain the same as before the tariff.3. If expected inflation is 100% and the real required return is 5%, what will the nominal interestrate be according to the Fisher Effect?A NSWER. According to the Fisher Effect, the relationship between the nominal interest rate, r, the real interest rate a, and the expected inflation rate, i, is 1 + r = (1 + a)(1 + i). Substituting in the numbers in the problem yields 1 + r = 1.05 * 2 = 2.1, or r = 110%.4. Suppose the short-term interest rate in France was 3.7%, and forecast French inflation was1.8%. At the same time, the short-term German interest rate was2.6% and forecast Germaninflation was 1.6%.4.a. Based on these figures, what were the real interest rates in France and Germany?A NSWER. The French real interest rate was 1.037/1.018 - 1 = 1.87%. The corresponding real rate in Germany was 1.026/1.016 - 1 = 0.98%.4.b. To what would you attribute any discrepancy in real rates between France and Germany?67A NSWER . The most likely reason for the discrepancy is the inclusion of a higher inflation risk component in the French real interest rate than in the German real rate. Other possibilities are the effects of currency risk or transactions costs precluding this seeming arbitrage opportunity.5. In July, the one-year interest rate is 12% on British pounds and 9% on U.S. dollars.5.a. If the current exchange rate is $1.63:£1, what is the expected future exchange rate in one year? A NSWER . According to the IFE, the spot exchange rate expected in one year equals 1.63 * 1.09/1.12 = $1.5863.5.b. Suppose a change in expectations regarding future U.S. inflation causes the expected futurespot rate to decline to $1.52:£1. What should happen to the U.S. interest rate?A NSWER . If r us is the unknown U.S. interest rate, and assuming that the British interest rate stayed at 12% (because there has been no change in expectations of British inflation), then according to the IFE,1.52/1.63 = (1+r us )/1.12 or r us = 4.44%.6. Suppose that in Japan the interest rate is 8% and inflation is expected to be 3%. Meanwhile,the expected inflation rate in France is 12%, and the English interest rate is 14%. To the nearest whole number, what is the best estimate of the one-year forward exchange premium (discount) at which the pound will be selling relative to the French franc?A NSWER . Japan’s real interest rate is about 5% (8% - 3%). From that, we can calculate France’s nominal interest rate as about 17% (12% + 5%), assuming that arbitrage will equate real interest rates across countries and currencies. Since England’s nominal interest rate is 14%, for IRP to hold, the pound should sell at around a 3% forward premium relative to the French franc.7. An economic analysis firm has just published projected inflation rates for the U.S. andGermany for the next five years. U.S. inflation is expected to be 10% per year, and German inflation is expected to be 4% per year.7.a. If the current exchange rate is $0.95/€, what should the exchange rates be for the next fiveyears?A NSWER . According to PPP, the exchange rate for the euro at the end of year t should equal 0.95(1.10/1.04)t . Hence, projected exchange rates for the next five years are $1.0048, $1.0628, $1.1241, $1.1889, $1.2575.7.b. Suppose that U.S. inflation over the next five years turns out to average 3.2%, Germaninflation averages 1.5%, and the exchange rate in five years is $0.99/€. What has happened to the real value of the euro over this five-year period?A NSWER . According to Equation 4.7, the real value of the euro at the end of five years is0.9111 = )1.0321.015( x 0.99 = )i + (1)i + (1e = e 5t h t f t ’t8Hence, even though the euro has appreciated in nominal terms over this five-year period, it has fallen in real terms by 4.09% [(0.9111 - 0.95)/0.95].8. During 1995, the Mexican peso exchange rate rose from Mex$5.33/U.S.$ to Mex$7.64/U.S.$. Atthe same time, U.S. inflation was approximately 3% in contrast to Mexican inflation of about 48.7%.8.a. By how much did the nominal value of the peso change during 1995?A NSWER . During 1995, the peso fell from $0.1876 (1/5.33) to $0.1309 (1/7.64), which is equivalent to a devaluation of 30.24% ((0.1309 - 0.1876)/0.1876)8.b. By how much did the real value of the peso change over this period?A NSWER . Using Equation 4.7, the real value of the peso by the end of 1995 was $0.1890:0.1890 = 1.031.487 x 0.1309 = )i + (1)i + (1e = e t h t f t ’t Based on the real exchange rate, the peso has appreciated by 0.72% ((0.1890 - 0.1876)/0.1876). In other words, the real exchange rate stayed virtually constant, implying the PPP held during the year.9. Suppose three-year deposit rates on Eurodollars and Eurofrancs (Swiss) are 12% and 7%,respectively. If the current spot rate for the Swiss franc is $0.3985, what is the spot rate implied by these interest rates for the franc three years from now?A NSWER . If r us and r sw are the associated Eurodollar and Eurofranc nominal interest rates, then the IFE says thate t /e 0 = (1 + r us )t /(1 + r sw )twhere e t is the period t expected spot rate and e 0 is the current spot rate (SFr1 = $e). Substituting in the numbers given in the problem yields e 3 = $0.3985 * (1.12/1.07)3 = $0.4570.10. Assume the interest rate is 16% on pounds sterling and 7% on euros. At the same time,inflation is running at an annual rate of 3% in Germany and 9% in England.10.a. If the euro is selling at a one-year forward premium of 10% against the pound, is there anarbitrage opportunity? Explain.A NSWER . According to IRP, with a euro rate of 7% and a 10% forward premium on the euro against the pound, the equilibrium pound interest rate should be1.07 * 1.10 - 1 = 17.7%Since the pound interest rate is only 16%, there is an arbitrage opportunity. It involves borrowing pounds at 16%, converting them to euros, investing them at 7%, and then selling the proceeds forward, locking in a pound return of 17.7%.10.b. What is the real interest rate in Germany? In England?A NSWER. The real interest rate in Germany is 1.07/1.03 -1 = 3.88%. The real interest rate in England is1.16/1.09 -1 = 6.42%.10.c. Suppose that during the year the exchange rate changes from €1.8/£1 to €1.77/£1. What arethe real costs to a German company of borrowing pounds? Contrast this cost to its real cost of borrowing euros.A NSWER. At the end of one year, the German company must repay £1.16 for every pound borrowed. However, since the pound has devalued against the euro by 1.67% (1.77/1.80 - 1 = -1.67%), the effective cost in euros is 1.16 * (1 - 0.0167) - 1 = 14.07%. In real terms, given the 3% rate of German inflation, the cost of the pound loan is found as 1.1385/1.03 -1 = 10.74%.As shown above, the real cost of borrowing euros is 3.88%, which is significantly lower than the real cost of borrowing pounds. What happened is that the pound loan factored in an expected devaluation of about 9% (16% - 7%), whereas the pound only devalued by about 2%. The difference between the expected and actual pound devaluation accounts for the approximately 7% higher real cost of borrowing pounds.10.d. What are the real costs to a British firm of borrowing euros? Contrast this cost to its realcost of borrowing pounds.A NSWER. During the year, the euro appreciated by 1.69% (1.80/1.77 - 1) against the pound. Hence, a euro loan at 7% will cost 8.81% in pounds (1.07 * 1.0169 - 1). In real pound terms, given a 9% rate of inflation in England, this loan will cost the British firm -0.2% (1.0881/1.09 - 1) or essentially zero. As shown above, the real interest on borrowing pounds is 6.42%.11. Suppose the Eurosterling rate is 15%, and the Eurodollar rate is 11.5%. What is the forwardpremium on the dollar? Explain.A NSWER. According to IRP, if P is the forward premium on the dollar, then(1.115)(1 + P) = 1.15, or P = 3.14%.12. Suppose the spot rates for the euro, pound sterling, and Swiss franc are $0.92, $1.13, and $0.38,respectively. The associated 90-day interest rates (annualized) are 8%, 16%, and 4%; the U.S.90-day rate (annualized) is 12%. What is the 90-day forward rate on an ACU (ACU 1 = €1 + £1 + SFr 1) if interest parity holds?A NSWER. The key to working this problem is to recognize that the forward rate for a sum of currencies is just the sum of the forward rates for each individual currency. Also note that the forward rates are for 90 days. Hence, the interest rates must be divided by 4 to convert them into quarterly values. Assuming IRP, the forward rate for the pound is $1.13 * 1.03/1.04 = $1.1191, the forward rate for the euro is $0.92 * 1.03/1.02 = $0.9290, and the forward rate on the Swiss franc is $0.38 * 1.03/1.01 = $0.3875. If IRP holds, the 90-day forward rate on an ACU must, therefore, equal $1.1191 + $0.9290 + $0.3875 = $2.4356.13. Suppose that three-month interest rates (annualized) in Japan and the U.S. are 7% and 9%,respectively. If the spot rate is ¥142:$1 and the 90-day forward rate is ¥139:$1:13.a. Where would you invest?9A NSWER. The dollar return from a three-month investment in Japan can be found by converting dollars to yen at the spot rate, investing the yen at 1.75% (7%/4), and then selling the proceeds forward for dollars. This yields a dollar return equal to 142 * 1.0175/139 = 1.0395 or 3.95%. This return significantly exceeds the 2.25% (9%/4) return available from investing in the U.S.13.b. Where would you borrow?A NSWER. The flip side of a lower return in the U.S. is a lower borrowing cost. Borrow in the U.S.13.c. What arbitrage opportunity do these figures present?A NSWER. Absent transaction costs that would wipe out the yield differential, it makes sense to borrow dollars in New York at 2.25% and invest them in Tokyo at 3.95%.13.d. Assuming no transaction costs, what would be your arbitrage profit per dollar ordollar-equivalent borrowed?A NSWER. The profit would be a 1.7% (3.95% - 2.25%) return per dollar borrowed.14. Here are some prices in the international money markets:Spot rateForward rate (one year) Interest rate (€) Interest rate ($) = $1.34/€= $1.36/€= 3.5% per year = 4.75% per year14.a. Assuming no transaction costs or taxes exist, do covered arbitrage profits exist in the abovesituation? Describe the flows.A NSWER. The annual dollar return on dollars invested in Germany is (1.035 * 1.36)/1.34 - 1 = 5%. This return exceeds the 4.75% return on dollars invested in the U.S. by 0.25% per annum. Hence, arbitrage profits can be earned by borrowing dollars or selling dollar assets, buying euros in the spot market, investing the euros at 3.5%, and simultaneously selling the euro interest and principal forward for one year for dollars.14.b. Suppose now that transaction costs in the foreign exchange market equal 0.25% pertransaction. Do unexploited covered arbitrage profit opportunities still exist?A NSWER. In this case, the return on arbitraging dollars falls to1.0.35 * 1.36/1.34 * 0.99752 - 1.0475 = -0.48%Thus, arbitraging from dollars to euros has now become unprofitable and no capital flows will occur.14.c. Suppose no transaction costs exist. Let the capital gains tax on currency profits equal 25%and the ordinary income tax on interest income equal 50%. In this situation, do covered arbitrage profits exist? How large are they? Describe the transactions required to exploit these profits.10A NSWER. In this case, the after-tax interest differential favors the U.S. is (0.0475 * 0.50 - 0.035 * 0.50)/(1 + .0035 * 0.50) = (0.02375 - 0.0175)/1.0175 = 0.61%, while the after-tax forward premium on the euro is 0.75(1.36 - 1.34)/1.34 = 1.12%. Since the after-tax forward premium exceeds the after-tax interest differential, dollars will continue to flow to Germany as before.15. Suppose today’s exchange rate is $1.35/€. The six-month interest rates on dollars and eurosare 6% and 3%, respectively. The six-month forward rate is $1.3672. A foreign exchange advisory service has predicted that the euro will appreciate to $1.375 within six months.15.a. How would you use forward contracts to profit in the above situation?A NSWER. By buying euros forward for six months and selling them in the spot market, you can lock in an expected profit of $0.0078, (1.375 - 1.3672) per euro bought forward. This is a semiannual return of 0.57% (0.0078/1.03672). Whether this profit materializes depends on the accuracy of the forecast.15.b. How would you use money market instruments (borrowing and lending) to profit?A NSWER. By borrowing dollars at 6% (3% semiannually), converting them to euros in the spot market, investing the euros at 3% (1.5% semiannually), selling the euro proceeds at an expected price of $1.3750/ Є, and repaying the dollar loan, you will earn an expected semiannual return of 1.30%:Return per dollar borrowed = (1/1.35) * 1.015 * 1.3750 - 1.03 = 0.38%15.c. Which alternatives (forward contracts or money market instruments) would you prefer?Why?A NSWER. The return per dollar in the forward market is substantially higher than the return using the money market speculation. Other things being equal, therefore, the forward market speculation would be preferred.SUGGESTED SOLUTIONS TO CHAPTER 5 PROBLEMS1. How would each of the following transactions show up on the U.S. BOP accounts?1.a. Payment of $50 million in Social Security to U.S. citizens living in Costa Rica.A NSWER. This will show up as a net unilateral transfer abroad, which is a deficit on the services account.1.b. Sale overseas of 125,000 Elvis Presley CDs.A NSWER.This will show up as a merchandise export.1.c. Tuition receipts of $3 billion received by American universities from foreign students.A NSWER. This will show up as an export of U.S. services.1.d. Payment of $1 million to U.S. consultants A.D. Little by a Mexican company.A NSWER. This will show up as an export of U.S. services.1.e. Sale of a $100 million Eurobond issue in London by IBM.11A NSWER. This will show up as an import of capital. If IBM uses to money to invest overseas, this import will be offset by an equal export of capital.1.f. Investment of $25 million by Ford to build a parts plant in Argentina.A NSWER. This will show up as an export of capital.1.g. Payment of $45 million in dividends to U.S. citizens from foreign companies.A NSWER.This will show up as an export of services (for the use of capital), which is a surplus on the services account.2. Set up the double-entry accounts showing the appropriate debits and credits associated with thefollowing transactions:2.a. ConAgra, a U.S. agribusiness, exports $80 million of soybeans to China and receives paymentin the form of a check drawn on a U.S. bank.A NSWER. A credit is recorded for the increase in U.S. exports and a debit is recorded to reflect a decrease in liabilities to a foreigner associated with the check drawn on a U.S. bank, which is a private capital outflow:Credit Debitexports $80,000,000U.S.Private liabilities to foreigners $80,000,0002.b. The U.S. government provides refugee assistance to Somalia in the form of corn valued at $1million.A NSWER. This transaction appears as a credit to U.S. exports and a debit to the account called unilateral transfers:Credit Debitexports $1,000,000U.S.transfer $1,000,000 Unilateral2.c. Dow Chemical invests $500 million in a chemical plant in Germany financed by issuing bondsin London.A NSWER. A debit is recorded to reflect the increase in U.S. investment abroad (the acquisition of foreign assets) and a credit is recorded for the inflow of foreign capital used to finance that investment:Credit Debitassets $500,000,000 PrivateforeignPrivate liabilities to foreigners $500,000,0002.d. General Motors pays $5 million in dividends to foreign residents, who choose to hold thedividends in the form of bank deposits in New York.A NSWER. A debit is recorded for the importation of services (the use of foreign capital) and a credit is recorded to reflect the increase in liabilities (the bank deposit) to a foreigner, which is a source of funds:12。