Currency Reports

Instructions for the project: FIN 4375
The following pages contain annual data on interest rates, inflation rates, and percentage change
in exchange rates (based on indirect quotes) for foreign countries, including the US, for the
period 1995 – 2007.
Each one of you is assigned to a foreign country and a six-year time period (1995-2000
or 2001-2006). Please consult the attached list to determine your assigned country and
time period.
Please use the attached sheets to answer the questions listed based on calculations using the data
for the assigned country and the US during the assigned time period.
Use geometric instead of arithmetic averages.
Use exact instead of the approximate method.
There is only one correct answer to these questions. You will be graded on whether or not
your answers are correct.
The necessary information and concepts are all from Chapter 4. I will discuss the solution
techniques to these problems only during class. I will not discuss them with anyone on an
individual basis outside the class.
Please answer the following five questions:
Q1. During the assigned time period:
US dollar appreciated / depreciated (choose one) in real terms against the currency of foreign
country.
Q2. During the assigned period, what was the average uncovered rate of return from the US
viewpoint for the foreign country?
Q3. During the assigned period, what was the average uncovered rate of return from the foreign
country’s viewpoint?
Q4. Based on your answers to questions 2 and 3, given perfect hindsight about interest rates and
exchange rate changes during the assigned time period you should have:
Invested/ borrowed (choose one) in the US and invested / borrowed (choose one) in foreign
country.
Q5. Assume that you could both borrow and invest at the average interest rates prevailing in
foreign country and in the US during the assigned time period. Also assume that you have a line
of credit for one million dollars in the US or an equivalent amount in foreign country. Given
perfect hindsight about interest rates and exchange rate changes, please calculate your total
profit in dollars using uncovered interest arbitrage during the assigned time period if you
followed the strategy chosen in Q4.
Work Sheet: Statistical Report

Geometric and Arithmetic Means of Rates and Percentages
If the rates for years 1, 2, 3, … N are R1, R2, R3, …. RN , then you can calculate the arithmetic and geometric mean or averages
of these rates over the N years, as follows:
Arithmetic Mean = (R1 + R2 + R3 + .. + RN ) / N
Geometric Mean = [(1+R1 )* (1+ R2 )* (1+ R3 ) * **(1+ RN ) ]1/ N – 1
Note, that in the geometric mean formula, the percentages are written in decimals. For example, we use 0.10 instead of 10%
and -0.02 instead of -2%. Also in the end we take the Nth root of the product, where N is the number of years in the averaging
period.
It is important to know that the geometric mean is a more accurate measure than the arithmetic mean. Always try to
use the geometric mean method when calculating averages of rate of returns or percentages.
Let us assume the following rates of return for the five year period (2000-2004) :

Our estimate of the average rate of return over the 2000-04 period based on:
Arithmetic Mean = (0.0475 – 0.08 + 0.005 + 0.23 + 0.07) / 5 = 0.0545 = 5.45%
Geometric Mean = [(1+ 0.0475)*(1 – 0.08)*(1 + 0.005)*(1 + 0.23)*(1 + 0.07) ]1/ 5 – 1
= (1.02746672)1/ 5 – 1
= 0.04973 = 4.973%
4.973 % is a more accurate measure of the average return over the 2000-04 period than 5.45%
Reference Tables International Economic Trends
7
Research Division
Federal Reserve Bank of St. Louis
Australia 4.6 2.6 0.2 0.9 1.5 4.5 4.4 3.0 2.8 2.3 2.7 3.5 2.3
Austria 1.6 1.8 1.2 0.8 0.5 2.0 2.3 1.7 1.3 2.0 2.1 1.7 2.2
Canada 2.1 1.6 1.6 1.0 1.7 2.7 2.5 2.3 2.8 1.9 2.2 2.0 2.1
Chile 8.2 7.4 6.1 5.1 3.3 3.8 3.6 2.5 2.8 1.1 3.0 3.4 4.4
China 17.1 8.3 2.8 -0.9 -1.4 0.3 0.5 -0.8 1.2 3.9 1.8 1.5 4.8
Denmark 2.1 2.1 2.2 1.8 2.5 2.9 2.4 2.4 2.1 1.2 1.8 1.9 1.7
Euro Area 2.6 2.1 1.7 1.2 1.1 2.2 2.4 2.3 2.1 2.1 2.2 2.2 2.1
Finland 0.4 1.1 1.2 1.3 1.3 2.9 2.7 2.0 1.3 0.1 0.8 1.3 1.6
France 1.8 2.1 1.3 0.7 0.6 1.8 1.8 1.9 2.2 2.3 1.9 1.9 1.6
Germany
.
1.2 1.5 0.6 0.6 1.4 1.9 1.4 1.0 1.8 1.9 1.8 2.3
Greece
.
7.9 5.4 4.5 2.1 2.9 3.7 3.9 3.4 3.0 3.5 3.3 3.0
Indonesia 9.4 8.0 6.2 58.4 20.5 3.7 11.5 11.9 6.6 6.2 10.5 13.1 6.4
Ireland
.
2.2 1.3 2.1 2.5 5.3 4.0 4.7 4.0 2.3 2.2 2.7 2.9
Israel 10.0 11.3 9.0 5.5 5.2 1.1 1.1 5.7 0.7 -0.4 1.3 2.1 0.5
Italy 5.4 4.0 1.9 2.0 1.7 2.6 2.3 2.6 2.8 2.3 2.2 2.2 2.0
Japan -0.1 0.1 1.8 0.7 -0.3 -0.7 -0.8 -0.9 -0.2 -0.0 -0.3 0.2 0.1
Korea 4.5 4.9 4.4 7.5 0.8 2.3 4.0 2.8 3.5 3.6 2.8 2.2 2.5
Malaysia 3.4 3.5 2.7 5.3 2.7 1.5 1.4 1.8 1.0 1.5 3.0 3.6 2.0
Mexico 35.0 34.4 20.6 15.9 16.6 9.5 6.4 5.0 4.5 4.7 4.0 3.6 4.0
Netherlands 1.4 1.5 1.9 1.8 2.0 2.3 5.1 3.9 2.2 1.4 1.5 1.7 1.6
New Zealand 3.8 2.3 1.2 1.3 -0.1 2.6 2.6 2.7 1.8 2.3 3.0 3.4 2.4
Norway 2.4 1.2 2.6 2.3 2.3 3.1 3.0 1.3 2.5 0.5 1.5 2.3 0.7
Philippines 8.0 9.0 5.9 9.7 6.7 -0.2 6.8 3.0 3.6 5.9 7.6 6.3 2.8
Singapore 1.7 1.4 2.0 -0.3 0.0 1.4 1.0 -0.4 0.5 1.6 0.5 1.0 2.1
South Africa 8.7 7.4 8.6 6.9 5.2 5.3 5.7 9.2 5.9 1.4 3.4 4.6 7.1
Spain 4.6 3.6 1.9 1.8 2.2 3.5 2.8 3.6 3.1 3.1 3.4 3.6 2.8
Sweden 2.5 0.5 0.7 -0.3 0.5 0.9 2.4 2.2 1.9 0.4 0.5 1.4 2.2
Switzerland 1.8 0.8 0.5 0.0 0.8 1.6 1.0 0.6 0.6 0.8 1.2 1.1 0.7
Thailand 5.8 5.8 5.6 8.1 0.3 1.6 1.7 0.6 1.8 2.8 4.6 4.6 2.2
Turkey 89.1 80.4 85.7 84.6 64.9 54.9 54.4 45.0 21.6 8.6 8.2 9.6 8.8
United Kingdom 2.7 2.5 1.8 1.6 1.3 0.8 1.2 1.3 1.4 1.3 2.1 2.3 2.3
United States 2.8 2.9 2.3 1.5 2.2 3.4 2.8 1.6 2.3 2.7 3.4 3.2 2.9
Venezuela 60.0 99.8 50.0 35.8 23.6 16.2 12.5 22.4 31.1 21.7 16.0 13.6 18.7
Consumer Price Index
Percent change from year ago
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Reference Tables International Economic Trends
11
Research Division
Federal Reserve Bank of St. Louis

-2.4 11.0 12.5 -4.9 -16.7 -11.5 -3.4 1.2 -10.1
7.1 0.1 -0.0 4.3 1.4 -10.8 -7.1 -6.9 -6.4 -5.3
1.7 9.8 10.5 6.1 17.7 8.5 0.4 -11.8 -8.2 -5.3 -1.5
-2.7 -4.6
1.4 4.2 15.9 2.9 -5.3 -16.6 -9.0 0.1 -0.9 -8.4
4.4 15.5 3.1 -5.3 -16.5 -9.0 -0.1 -0.9 -8.4
-21.6 7.2 21.8 -9.3 -7.9 4.2 8.6 -5.6 -0.2
12.7 -3.9 -1.6 0.1 -0.7 -7.8
12.7 3.1 -7.5 -6.7 1.8 5.6 1.2
18.5 47.2 -15.3 -4.9 14.2 -3.2 -4.7 -3.9 -10.6 -6.8 -2.6
0.3 12.0 39.3 -3.2 0.0 0.0 0.0 -0.0 0.0 -0.3 -3.2 -6.3
4.2 15.4 4.6 -1.1 -1.2 3.4 11.7 4.6 -3.4 0.0 0.3
1.4 15.9 8.7 -9.5 -20.2 -12.4 -5.7 8.4 -11.7
2.1 -11.2 -11.4 -4.8 -4.4 -0.5 -8.7
2.0 12.4 38.8 -4.4 13.1 15.4 1.2 5.0 3.4 -1.7 -6.8 -10.1
-0.5 5.4 12.5 1.4 1.8 3.9 -0.1 -2.7 -3.0 -1.5 -4.6 -5.2
18.5 7.2 20.0 10.6 13.6 24.2 21.9 -28.2 -14.7 -1.4 6.4 4.2
4.1 3.9 11.0 12.7 -6.0 -16.9 -9.1 1.7 -1.3 -8.4
1.7 22.5 33.0 -8.3 6.2 10.7 -3.3 -3.4 -3.1 -0.1 -5.9 -15.0
71.7 60.6 49.3 96.0 23.0 -0.4 -5.0 -5.7 6.3 -8.8
1.1 -4.7 -1.2 2.4 6.7 5.3 -4.2 -8.1 -10.8 0.7 -1.3 -7.9
7.7 4.8 -1.6 4.9 6.0 -1.5 -12.3 -8.2 -1.9 -1.5 -5.6
17.1 12.0 10.6 12.3 6.5 60.4 38.4 17.7 10.5 2.7 0.0
Exchange Rates
Percent appreciation (+) or depreciation (-) of the U.S. dollar against the local currency
1
Percent appreciation (+) or depreciation (-) of the U.S. dollar against a group of currencies
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
International Economic Trends Reference Tables
10
Research Division
Federal Reserve Bank of St. Louis
Australia 7.7 7.2 5.4 5.0 5.0 6.2 4.9 4.7 4.9 5.5 5.6 6.0 6.7
Canada 5.9 3.1 4.6 5.0 5.2 5.8 2.1 2.9 2.7 2.6 3.5 4.3 4.8
Chile 13.7 13.5 12.0 14.9 8.6 9.2 6.2 3.8 2.7 1.9 3.9 5.1 5.6
China 10.4 9.0 8.6 4.6 3.2 3.2 3.2 2.7 2.7 3.3 3.3 3.3 3.3
Denmark 6.1 3.9 3.7 4.1 3.3 4.9 4.6 3.5 2.4 2.1 2.2 3.1 4.3
Euro Area 6.8 5.1 4.4 4.0 3.0 4.4 4.3 3.3 2.3 2.1 2.2 3.1 4.3
Indonesia 16.7 17.3 20.0 39.1 25.7 12.5 15.5 15.5 10.6 6.4 8.1 11.4 8.0
Israel 14.4 15.3 13.4 11.3 11.4 8.8 6.5 7.4 7.0 4.8 4.3 5.5
.
Japan* 1.2 0.6 0.6 0.7 0.2 0.2 0.1 0.1 0.0 0.0 0.0 0.2 0.7
Korea 12.6 12.4 13.3 15.0 5.0 5.2 4.7 4.2 4.0 3.7 3.4 4.2 4.8
Malaysia 5.5 6.4 6.4 6.9 3.5 2.9 2.8 2.7 2.8 2.4 2.5 3.2 3.4
Mexico 48.2 32.9 22.3 27.1 24.6 17.2 13.4 8.5 7.2 7.4 9.6 7.7 7.8
New Zealand 9.0 9.3 7.7 7.3 4.8 6.5 5.7 5.7 5.4 6.1 7.1 7.5 8.3
Norway 5.5 4.9 3.7 5.8 6.5 6.7 7.2 6.9 4.1 2.0 2.2 3.1 5.0
Philippines 11.8 12.3 12.9 15.0 10.0 9.9 9.7 5.5 5.9 7.3 6.1 5.3 3.4
Singapore 2.6 2.9 4.4 5.0 2.0 2.6 2.0 1.0 0.7 1.0 2.3 3.5 2.7
South Africa 13.5 15.0 15.3 16.5 12.9 10.1 9.7 11.2 10.7 7.5 6.9 7.3 9.1
Sweden 8.7 5.8 4.1 4.2 3.1 4.0 4.0 4.1 3.0 2.1 1.7 2.3 3.6
Switzerland 2.9 2.0 1.6 1.5 1.4 3.2 2.9 1.1 0.3 0.5 0.8 1.6 2.6
Thailand 10.3 12.1 21.7 2.6 1.2 1.7 2.1 1.6 1.0 1.8 3.8 4.9 3.2
Turkey 72.3 76.2 70.3 74.6 73.5 38.9 92.4 59.5 38.5 23.8 15.6 17.9 18.2
United Kingdom 6.7 6.0 6.8 7.3 5.4 6.1 5.0 4.0 3.7 4.6 4.7 4.8 6.0
United States 5.9 5.4 5.6 5.5 5.3 6.5 3.7 1.7 1.2 1.6 3.5 5.2 5.3
Venezuela 49.0 45.0 45.0 60.0 38.0 38.0 37.0 40.0 28.5 28.5 28.5 28.5 28.5
Short-Term Interest Rates
Annual percent
*The actual value for 2003 is 0.037; the actual value for 2004 is 0.029; the actual value for 2005 is 0.029.
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007