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Mid-Test Answer

Mid-Test Answer. Yohanes Jimmy. 1a. CA Deficit and Currency. CA Deficit  Import > Export Import  need more foreign currency Value of foreign currency increases Now: foreign currency is under-valued, or domestic currency is over-valued.

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Mid-Test Answer

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  1. Mid-Test Answer Yohanes Jimmy

  2. 1a. CA Deficit and Currency • CA Deficit  Import > Export • Import  need more foreign currency • Value of foreign currency increases • Now: foreign currency is under-valued, or domestic currency is over-valued. • Thus, foreign currency is predicted to be appreciated with respect to domestic currency in the future.

  3. 1b. CA Deficit and Crisis • Currency crisis is depreciation of domestic currency in significant amount within relatively short period. • That is caused by market participants short (sell) domestic currency in large amount, almost simultaneously. Why? • Increasing CA deficit  reduce foreign reserve • If foreign reserve depletes  domestic currency is depreciated more deeply. • Government will release fixed exchange rate policy, and concentrate to handle its increasing foreign debt. • Thus, domestic currency is devaluated in significant amount  market participants anticipate it by taking short position on domestic currency.

  4. 2. Balance of Payment • Current account (A) • Cap. and Fin. account(B) BOP (A+B) Indonesia’s BOP 2011 - 400 + 360 - 40

  5. 3. Forward Quotation • USD is depreciated with respect to CHF in spot market • USD/CHF Prev. day : 0.9272 USD/CHF Today : 0.9037 • USD/CHF: forward rate < spot rate  USD is traded at DISCOUNT with respect to CHF in fwd market. • Forward point quotation

  6. 4. Hedging Receive USD 1,000,000 in the next 6 months t=0 t=6th month FORWARD MARKET In the 6th month, we have to sell USD 1 million at agreed forward rate. IDR received: = 1,000,000 x 8,425 = 8,425,000,000

  7. 4. Hedging Receive USD 1,000,000 in the next 6 months • Borrow USD now • Sell USD to get IDR now • Time deposit in IDR for 6 months t=0 t=3rd month MONEY MARKET Borrow USD USD 1,000,000 USD 980,392 Pay loan in USD+ interest for 6 months (interest = 4% p.a.) Sell USD to get IDR Receive IDR at 8,300 Invest IDR in time deposit for 6 months (interest = 6% p.a.) IDR 8,137,254,902 IDR 8,381,378,549

  8. 4. Hedging • Receive from money market = IDR 8,425,000,000 • IDR before time deposit: • Convert to USD • USD Interest rate

  9. 5. Triangular Arbitrage Tokyo: EUR/JPY : 106.10 – 106.90 USD/JPY : 76.60 – 76.90 JPY Paris Tokyo Paris: USD/EUR : 0.7120 – 0.7170 CHF/EUR : 0.6870 – 0.6890 100 JPY/EUR : 0.9410 – 0.9450 Profit USD EUR Paris Start Cross rate in Paris: USD/JPY : 75.34 – 76.20 CHF

  10. 5. Triangular Arbitrage Initial Capital  CHF 5,000,000,000 Pa : Sell CHF to get EUR  EUR 3,435,000,000 Pa : Buy USD with EUR  USD 4,790,794,979 To : Sell USD to get JPY  JPY 366,974,895,397 Pa : Sell JPY to get EUR  EUR 3,453,233,766 Pa : Buy CHF with EUR  CHF 5,011,950,313 Profit  CHF 11,950,313 %Profit  0.239%

  11. 5. Triangular Arbitrage(another approach) Tokyo : USD/JPY 76.60 - 76.90 Paris : USD/JPY 75.34 - 76.20  quotation  cross rate  In EUR Profit = • Initial capital  CHF 5,000,000,000 • Convert CHF to EUR  EUR 3,435,000,000 • Profit from arbitrage  EUR 18,233,766  0.5308% • Capital + profit  EUR 3,453,233,766 • Convert EUR to CHF CHF 5,011,950,313 • Profit in CHF CHF 11,950,313

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