Problem 9.

1 Trepak (The Russian Dance)

The Russian ruble (RUB) traded at RUB 29.00/USD on January 2, 2009. On December 11,
2010, its value had fallen to RUB 31.45/USD. What was the percentage change in its value?
Assumptions
Spot rate, January 2, 2009 (RUB/USD)
Spot rate, December 11, 2010 (RUB/USD)
Calculation of percentage change:
Percentage change in the peso versus the dollar
Percent change = ( S1 - S2 ) ( S2 )

Rate
S1
S2

Values
29.00
31.45

-7.79%

Problem 9.2 Center of the World

The Ecuadorian sucre (S) suffered from hyper-inflationary forces throughout 1999. Its value
moved from S5,000/$ to S25,000/$. What was the percentage change in its value?
Assumptions
Initial spot rate, 1999 (Sucre/$)
Ending spot rate, 1999 (Sucre/$)
Calculation of percentage change:
Percentage change in the sucre versus the dollar
Percent change = ( S1 - S2 ) ( S2 )

Rate
S1
S2

Values
5,000
25,000

-80.00%

Problem 9.3 Reais Reality

The Brazilian reais's (R$) value was R$1.80/$ on Thursday, January 24, 2008. Its value
fell to R$2.39/$ on Monday, January 26, 2009. What was the percentage change in its
value?
Assumptions
Spot rate, Thursday, January 24, 2008, R$/$
Spot rate, Monday, January 26, 2009, R$/$
Calculation percentage appreciation or depreciation
Percentage change in the real versus the dollar
Because the real fell in value:
Percent change = ( S1 - S2 ) ( S2 )

Values
1.80
2.39

-24.69%
Depreciation

Problem 9.4 That's Loonie

The Canadian dollars value against the U.S. dollar has seen some significant changes over recent history.
Using the following graph of the C$/US$ exchange rate for the 30 year period between 1980 and end-of-year
2010 to estimate the percentage change in the Canadian dollars value (its affectionately known as the "loonie")
versus the dollar for the following periods.
a. January 1980 - December 1985
b. January 1986 - December 1991
c. January 1992 - December 2001
d. January 2002 - December 2006
e. January 2007 - December 2008
f. January 2009 - December 2010
The following values are taken by "eye-balling" the graph. Although you may not have the exact same values,
you should be close.

Time Period
Jan 1980 - Dec 1985
Jan 1986 - Dec 1991
Jan 1992 - Dec 2001
Jan 2002 - Dec 2006
Jan 2007 - Dec 2008
Jan 2009 - Dec 2010

Starting Value
(C$/US$)
1.16
1.41
1.18
1.60
1.18
1.23

Ending Value
(C$/US$)
1.40
1.15
1.57
1.15
1.23
1.00

Percent change = (Starting Value - Ending Value ) / (Ending Value)

Change in the value

of the loonie
(percent)
-17.1%
22.6%
-24.8%
39.1%
-4.1%
23.0%

Problem 9.5 Paris to Tokyo

The Japanese yen-euro cross rate is one of the more significant currency values for global trade and commerce.
The graphic at right shows this cross-rate from when the euro was launched in January 1999 through the end-ofyear 2010. Estimate the change in the value of the yen over the following three periods of change.

Starting Value
(/)
131
108
169

Time Period
a. Jan 1999 - Aug 2001
b. Sep 2001 - June 2008
c. July 2008 - Dec 2010

Ending Value
(/)
109
166
110

Change in the
value of the yen
(percent)
20.2%
-34.9%
53.6%

Percent change = ( S1 - S2 ) ( S2 )

Monthly Average Exchange Rates:

Japanese Yen per European Euro

Source: PACIFIC Exchange Rates 2010 by Prof. Werner Antweiler, University of British Columbia,
Vancouver BC, Canada.

Problem 9.6 Lowering the Lira

The Turkish lira (TL) was officially devalued by the Turkish government in February 2001
during a severe political and economic crisis. The Turkish government announced on February
21 that the lira would be devalued by 20%. The spot exchange rate on February 20th was
TL68,000/$.
Assumptions
Spot rate, February 20, 2001 (TL/$)
Turkish government announces a devaluation of:
Spot rate, February 24, 2001 (TL/$)

Values
68,000
-20.00%
100,000

a. What was the exchange rate after devaluation?

Spot rate after devaluation

85,000

Check calculation: percentage change in values

-20.0%

b. What was percentage change after falling to TL100,000/$?

Percentage change from initial value

-32.0%

Percentage change from "devalued" value

-15.0%

Problem 9.7 Cada Seis Aos

Mexico was famous or infamous for many years in having two things every six years (cada
seis aos in Spanish): a presidential election and a currency devaluation. This was the case in
1976, 1982, 1988, and in 1994. In its last devaluation on December 20, 1994, the value of the
Mexican peso (Ps) was officially changed from Ps3.30/$ to Ps5.50/$. What was the percentage
devaluation?
Assumptions
Spot rate, December 20, 1994 (Ps/$)
Spot rate, December 21, 1994 (Ps/$)
Calculation percentage of devaluation:
Percentage change in the peso versus the dollar

Rate
S1
S2

Values
3.30
5.50

-40.00%

Percent change = ( S1 - S2 ) ( S2 )

The peso since that time, and we have now weathered two additional six-year dates (2000 and
2006), has been remarkable stable against all major currencies, including the dollar.

Problem 9.8 Brokedown Palace

The Thai baht (Bt) was devalued by the Thai government from BT25/$ to BT29/$ on July
2, 1997. What was the percentage devaluation of the baht?

Assumptions
Opening spot rate, July 2, 1997 (Bt/$)
Closing spot rate, July 2, 1997 (Bt/$)
Calculation of percentage change:
Percentage change in the baht versus the dollar
Percent change = ( S1 - S2 ) ( S2)

Rate
S1
S2

Values
25.00
29.00

-13.79%

Problem 9.9 Forecasting the Argentine Peso

As illustrated in the graph, the Argentine peso moved from its fixed exchange rate of Ps1.00/$ to over Ps2.00/$ in a matter of days in early January 2002. After a brief
period of high volatility, the peso's value appeared to settled down into a range varying between 2.0 and 2.5 pesos per dollar. If you were forecasting the Argentine peso
further into the future, how would you use the information in the graphic -- the value of the peso freely-floating in the weeks following devaluation -- to forecast its future
value?

Date
February 1st (Ps/$)
February 28th (Ps/$)
Percent change

"Eye-balled"
Values
2.00
2.20
-9.09%

If peso continued to fall at same rate for 1 month:

March 1, 2002 (Ps/$)
Percent change
March 30, 2002 (Ps/$)

Source: 2002 by Prof. Werner Antweiler, University of British Columbia, Vancouver, BC, Canada. Time period shown in
diagram: Jul 1, 2000 - Jan 27, 2002.

The period immediately following the peso's devaluation was highly volatile and a period of transition. Most forecasters would view the February period
as a period in which the new exchange rate is beginning to "stabilize" in its trading.

2.20
-9.09%
2.42

Forecasting the Pan-Pacific Pyramid: Australia, Japan & The United States

Country
Australia
Japan
United States

Latest Qtr
4.3%
1.6%
1.9%

Gross Domestic Product

Forecast
Qtr*
2007e
3.8%
4.1%
-1.2%
2.0%
3.8%
2.0%
Consumer Prices

Country
Australia
Japan
United States

Year Ago
4.0%
0.9%
2.1%

Country
Australia
Japan
United States

Trade Balance
Last 12 mos
(billion $)
-13.0
98.1
-810.7

Latest
2.1%
-0.2%
2.8%

Forecast
2007e
2.4%
0.0%
2.8%

Curent Account
Last 12 mos
Forecast 07
(billion $)
(% of GDP)
-$47.0
-5.7%
$197.5
4.6%
-$793.2
-5.6%

Forecast
2008e
3.5%
1.9%
2.2%

Industrial
Production
Recent Qtr
4.6%
4.3%
1.9%

Unemployment
Rate
Latest
4.2%
3.8%
4.7%

Interest Rates
3-month
1-yr Govt
Latest
Latest
6.90%
6.23%
0.73%
1.65%
4.72%
4.54%
Current Units (per US$)
Oct 17th
1.12
117
1.00

Year Ago
1.33
119
1.00

Source: Data abstracted from The Economist, October 20, 2007, print edition. Unless otherwise noted, percentages are percentage changes over one
year. Rec Qtr = recent quarter. Values for 2007e are estimates or forecasts.

Problems 9.10-9.13 Forecasting the Pan-Pacific Pyramid: Australia, Japan & The United States

Country
Australia
Japan
United States

Gross Domestic Product

Forecast
Qtr*
2007e
3.8%
4.1%
-1.2%
2.0%
3.8%
2.0%

Latest Qtr
4.3%
1.6%
1.9%

Consumer Prices
Country
Australia
Japan
United States

Year Ago
4.0%
0.9%
2.1%

Country
Australia
Japan
United States

Trade Balance
Last 12 mos
(billion $)
-13.0
98.1
-810.7

Latest
2.1%
-0.2%
2.8%

Forecast
2007e
2.4%
0.0%
2.8%

Current Account
Last 12 mos
Forecast 07
(billion $)
(% of GDP)
-$47.0
-5.7%
$197.5
4.6%
-$793.2
-5.6%

Forecast
2008e
3.5%
1.9%
2.2%

Industrial
Production
Recent Qtr
4.6%
4.3%
1.9%

Unemployment
Rate
Latest
4.2%
3.8%
4.7%

Interest Rates
3-month
1-yr Govt Bond
Latest
Latest
6.90%
6.23%
0.73%
1.65%
4.72%
4.54%
Current Units (per US$)
Oct 17th
1.12
117
1.00

Year Ago
1.33
119
1.00

Source: Data abstracted from The Economist, October 20, 2007, print edition. Unless otherwise noted, percentages are percentage changes over one
year. Rec Qtr = recent quarter. Values for 2007e are estimates or forecasts.

10. Current spot rates. What are the current spot exchange rates for the following cross rates?
a. Japanese yen/US dollar exchange rate
b. Japanese yen/Australian dollar exchange rate
c. Australian dollar/US dollar exchange rate

= '/$
= /$ / A$/$
= A$/$

117.00
104.4643
1.1200

11. Purchasing power parity forecasts. Assuming purchasing power parity, and assuming that the forecasted change in consumer
prices is a good proxy of predicted inflation, forecast the following cross rates:
a. Japanese yen/US dollar in 1 year
b. Japanese yen/Australian dollar in 1 year
c. Australian dollar/US dollar in 1 year

= Spot (/$) x (1 + -inflation) / (1 + $-inflation)

= Spot (/A$) x (1 + -inflation) / (1 + A$-inflation)
= Spot (A$/$) x (1 + A$-inflation) / (1 + $ inflation)

113.8132
102.02
1.1156

12. International Fisher forecasts. Asssuming International Fisher applies to the coming year, forecast the following future spot
exchange rates using the government bond rates for the respective country currencies:
a. Japanese yen/US dollar in 1 year
b. Japanese yen/Australian dollar in 1 year
c. Australian dollar/US dollar in 1 year

= Spot (/$) x (1 + i-) / (1 + i-$)

= Spot (/A$) x (1 + i-) / (1 + i-A$)
= Spot (A$/$) x (1 + i-A$) / (1 + i-$)

113.77
99.96
1.1381

13. Implied real interest rates. If the nominal interest rate is the government bond rate, and the current change in consumer prices is
used as expected inflation, calculate the implied "real" rates of interest by currency.
a. Australian dollar "real" rate
b. Japanese yen "real" rate
c. US dollar "real" rate

= (1 + nominal) / (1 + A$ consumer price change) - 1

= (1 + nominal) / (1 + consumer price change) - 1
= (1 + nominal) / (1 + $ consumer price change) - 1

3.74%
1.65%
1.69%

Problems 9.14-9.15 Forecasting the Pan-Pacific Pyramid: Australia, Japan & The United States

Country
Australia
Japan
United States

Latest Qtr
4.3%
1.6%
1.9%

Gross Domestic Product

Forecast
Qtr*
2007e
3.8%
4.1%
-1.2%
2.0%
3.8%
2.0%
Consumer Prices

Country
Australia
Japan
United States

Year Ago
4.0%
0.9%
2.1%

Country
Australia
Japan
United States

Trade Balance
Last 12 mos
(billion $)
-13.0
98.1
-810.7

Forecast
2007e
2.4%
0.0%
2.8%

Latest
2.1%
-0.2%
2.8%

Current Account
Last 12 mos
Forecast 07
(billion $)
(% of GDP)
-$47.0
-5.7%
$197.5
4.6%
-$793.2
-5.6%

Forecast
2008e
3.5%
1.9%
2.2%

Industrial
Production
Recent Qtr
4.6%
4.3%
1.9%

Unemployment
Rate
Latest
4.2%
3.8%
4.7%

Interest Rates
3-month
1-yr Govt Bond
Latest
Latest
6.90%
6.23%
0.73%
1.65%
4.72%
4.54%
Current Units (per US$)
Oct 17th
1.12
117
1.00

Year Ago
1.33
119
1.00

Source: Data abstracted from The Economist, October 20, 2007, print edition. Unless otherwise noted, percentages are percentage changes over one
year. Rec Qtr = recent quarter. Values for 2007e are estimates or forecasts.

14. Forward rates. Using the spot rates and three-month interest rates above, calculate the 90-day forward rates for:
a. Japanese yen/US dollar exchange rate
b. Japanese yen/Australian dollar exchange rate
c. Australian dollar/US dollar exchange rate

= Spot (/$) x (1 + i 3 month) / (1 + i$ 3 month)

= Spot (/A$) x (1 + i 3 month) / (1 + iA$ 3 month)
= Spot (A$/$) x (1 + A$ 3 month) / (1 + i$ 3 month)

115.85
102.88
1.1260

Note: All interest rates need to be adjusted for a 90 day period of a 360 day year for the calculation.
15. Real economic activity and misery. Calculate the country's Misery Index (unemployment + inflation) and then use it like interest
differentials to forecast the future spot exchange rate, one year into the future.
Australia's Misery Index
Japan's Misery Index
United States's Misery Index

6.60%
3.80%
7.50%

a. Japanese yen/US dollar exchange rate in 1 year

b. Japanese yen/Australian dollar exchange rate in 1 year
c. Australian dollar/US dollar exchange rate in 1 year

Forecast spot = Spot x ( 1 + Misery-1) / ( 1 + Misery-2)

Starting
Spot Rate
117.00
104.46
1.1200

Forecast
Spot Rate
112.9730
101.7204
1.1106