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- Using the Big Mac Index for Hungary. Link
a. Show the math suggesting the Forint is 46.5% undervalued relative to the USD.
b. What is your profit from executing a Big Mac arbitrage if you borrow $5000 from your mom?
c. Suppose you and 1,000,000 of your closest friends all pursued the strategy you outlined in part (b) at the same time. What would be the impact on prices of Big Macs in Hungary and the U.S.? What would be the impact on USDHUF? - Suppose inflation in the U.S. is projected to be 2% in the coming year. The current spot price is USDBRL 5.6178 and you think the spot rate in 1 year will be USDBRL 6.03087. What is your forecast for inflation in Brazil in the coming year?
- Suppose you could borrow at 0.5% in EUR and earn 6% in Brazil (both for one year). Suppose also the current exchange rate is EURBRL 5.00. Finally, you are fairly certain the EUR will not spike in value too much over the coming months/years.
a. You will execute a carry trade. What three transactions do you do today? You have a credit line at Deutsche Bank of €20,000,000.
b. Suppose the rate in one year is (1) EURBRL 4.85 and (2) EURBRL 5.45. What profit/loss did you realize? - Suppose you purchased 100 shares of Vodafone one year ago. At the time the shares were trading at £10.88 per share and the exchange rate was GBPUSD 1.2533. You sold your shares today for £13.53 per share and reconverted your proceeds into dollars at GBPUSD 1.3800. What was the return on your investment in percentage terms?
- Suppose you purchased 300 shares of Volvo three months ago. At the time the shares were trading at 196.25 Swedish krona. You sold your shares today for kr 218.40 per share and reconverted your proceeds into dollars at USDSEK 8.4223, earning a return of -3.5%. To earn this return, what exchange rate did you use when initially buying the krona?
Sample Solution
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