Problem Set 1

1. Suppose that a BMW costs E 45,000 in Germany and that the current USD/EUR exchange rate
is 0.7624. Calculate the dollar price of the BMW.

2. Consider the following exchange rates:

EUR/USD = 1.2500 ($/Euro)

USD/CAD = 1.1000 (CAD/$)

EUR/CAD = 1.3550 (CAD/Euro)

How could you use this information to make money in the currency markets?

3. Suppose that you took a short position on 12,500,000 Japanese Yen future (remember, a
short position involves selling Yen) at a price of 104.5 Yen/$. If the spot rate on the contract's
expiration date was 103.45 Yen/$, calculate your profit/loss from the futures contract.

4. Consider the following balance of payments data. (in billions of dollars)

Merchandise Exports $100

Merchandise Imports $125
Service Imports $90
Service Exports $80
Income received from abroad $110
Income payments to foreigners $150
Increase in US ownership of private assets abroad $160
Increase in foreign ownership of private US assets $200
Increase in home official reserve assets $30
Increase in foreign official assets in US $35

Assuming that unilateral transfers are zero, find the trade balance, the current account
balance, the capital and financial accounts balance, the Balance of Payments, and the
statistical discrepancy.

5. Suppose that the U.S. sells F-16 fighter planes to the Israeli government. Explain how this
transaction creates offsetting credits and debits in the Balance of Payments accounts.