Chapter 15. Chapter 15

Data Exercises
Chapter 15
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Now that you have learned about equilibrium in the forex market, let’s explore the same concepts using exchange rate data from FRED (Federal Reserve Economic Data), provided by the Federal Reserve Bank of St. Louis. Go to Federal Reserve Economic Data to access the full dataset.

To access the data:

1. Go to Federal Reserve Economic Data and enter “US exchange rate” into the search field.

2. Select Japan / U.S. foreign exchange rate (daily, not seasonally adjusted).

3. Locate the week November 14, 2016, to November 18, 2016.

4. To determine the table values, hover the cursor over one of the curves. Doing so will display the values for all curves on that particular date.

5. When entering the spot rate in the table below, convert to dollars per yen and round to the fifth decimal place.

Question

a. You’ve just covered the forex equilibrium in your economics class. Now let’s examine that equilibrium further using real-world data to explore those concepts. Using the data from November 14, 2016, to November 18, 2016, complete the table (the spot exchange rate should be rounded to five decimal places and all answers should be rounded to the fourth decimal place).

Interest Rate on Dollar Deposits Interest Rate on Foreign Currency Deposits Spot Exchange Rate [MATH: (E_{\frac{\$}{Y}}) ]() Expected Future Exchange Rate [MATH: (E^e_{\frac{\$}{Y}}) ]() Expected Foreign Currency Depreciation Against the Dollar Expected Dollar Return on Foreign Deposits
Japan
November 14 0.0490 0.12 i0s7hyoQUsOkCeMxrvxovKU2kRYojD/+MYOUWqrt8NMW+vJSooReCYstkhFgQBYCY8sLsb9hAUciJsJiTfIqb0eCyg58EFFqb/La+2OkfLg2P5M6v4oFY18lPmp8MNwcvCy0BlwoDHTE6zJ9WA7HyynRPDFDwx7ozm8WxxCz/Cs= 0.00851 7LBct+E7gqTMwV1cvq99J1cY7Sxe9ssvQAYJSovdDeW/P2uMqsSe5F79j+ir7Nqm THEVw6rKpMWAnU5d+abqix0J7PF4lqZ0g6sL5dNK7CLKVjGl1VIhVnb8cFcj7iG2
November 15 0.0490 0.12 7NpvKfhF8PJF0jijE21UAhidan5pB1Sh8hUVq2WLUqlJcT/U3QRnLk6tdU3cr5fwxDKyqS4ZlFDN9KEc04Ds0tm3nESx7PqIiHJw1+3ujXN71EptTAqBxaM/8Qx1wOY7MHw1XWaqj69fLg0qKNV84cr61zhd68k77v9dIifDn8s= 0.00851 Tz/2TqfOTkmNfXDx6vreXxcNscbefVZqkv2eDrhhIaPS1dXGADRdYJoMWF2MqM3q QW/E3mPEq5r0EUkyBZGCb4beho880QpX6Pg2QUQlk2l/mk4c1h6y3Pf56Wq8s9j+
November 16 0.0490 0.12 h8w3vW4eSElsahtbHJofXTAIbLFRWpKUZWx3CL66OmwFMiETlZoeJRgt3xDGHi2dJz5xRPjBLptD1OepNRagfl+YomAO9po8YR/GXlmrDam8Lc1UTVQz2D6IlNmHs3zE9FT7npAwY86uRiqKJs31fqdnoARMDHhh5aKILgW3SMU= 0.00851 yrCKuw37LbqNIgZvuA6kxK/ZpTpAFnajV9FXlJeBl3N7D1WPG8dTP04dFAq65l3T Xr8mQGlRCzh3qI4dSiIx2Yjs9j82JMhuJNCB58tbOtcUySn9V9ra7LC4kuK148MH
November 17 0.0490 0.12 q7RBWiY216zYVDoeWjaJlVRoCvMCWoGqa9Tzw5j+hbCf3kRnPbt2mcYWi9oupgIh8zwcJB8SYWImD+YJJd0OCYPqIQWU8DXWyGEIq+stjLude+7TEF/qzyBxYFoYkEypns1sCOVcHUPvDXOz9VWEHphHUSGuGKAtLMiYxNfm+TY= 0.00851 /yPc4e8vqHq0RGMuqexhPmp7eCJSL1k/eyc8k0o3vXo62nhOEUB4VB9L/rZR/2ha Eu/MP+QP4H4TonimUZztAqyuvECqgUi3R4nfopEbit6DUZmY9IGQc20zMgR9+x/Y
November 18 0.0490 0.12 LYpHZItW736hdDfrB+6KjYH/zMObjSm+jE/cL+GxT/BaKOkhB7yeFWMhMRnbWiGxq8o/fruNp5vnlgxJrx7MJB4w0deyA4v2x0rM/KVRH5axWSYodAxTDWYrji2/6cHQm8LAy0q8jLIBXyuxcmy00fG3Iatyt42mpBGNz8VoSQk= 0.00851 3Z391glI7FaATV1WgpvBqxHWUpjJqjBxffccNCTS8fHg2LVBAmIkLGwA2I1dRr9O +sdXN2lNm0gfQAMFfOfBNR+sSLAoWoTmNFeTozbqv5wnmKwXkhWpaD3f4rJbznjk
To determine the table values in the first column, hover the cursor over one of the series and the values for both countries on that date will appear. Make sure to answer as dollars per yen. To calculate the depreciation column, note that the depreciation rate can be calculated by subtracting the spot rate from the expected rate and then dividing by the spot rate. To calculate the expected return on foreign dollars, add the depreciation rate to the foreign interest rate.

Question 15.1

Given the data, the return on dollar deposits curve will be fairly flat, as it does not vary with the spot rate. The expected dollar return on foreign deposits will vary inversely with the spot rate.
Make sure to use a scatter plot with the spot rate on the horizontal axis.

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Question 15.2

Starting from the lower right part of the foreign return curve, the yen depreciates (the exchange rate moves left), leading to a higher foreign return. This is due the interest that would be earned over the one-year period in yen will be exchanged for more dollars given the higher dollar–yen exchange rate.
Consider that an American investing in foreign deposits involves a rate of return based on the foreign interest rate but also movements in the exchange rate, since any returns will need to be converted into dollars after one year.
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Question 15.3

At a rate of 0.00916 yen per dollar, the expected dollar return on foreign deposits equals the return on dollar deposits. If the rates of return are equal, there is no incentive to move investments from domestic to foreign and vice-versa.
Consider that an American investing in foreign deposits involves a rate of return based on the foreign interest rate but also movements in the exchange rate, since any returns will need to be converted into dollars after one year.
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Data Exercises
Chapter 15
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Now let’s explore the asset approach to exchange rates.

Question 15.4

Contractionary monetary policy in the United States would shift the supply of real money balances to the left, increasing the U.S. interest rate. An increase in the U.S. interest rate would shift the return on U.S. investments up, leading to a depreciation of the yen relative to the dollar as the equilibrium exchange rate moves left along the horizontal axis.
Consider what a contractionary U.S. monetary policy would do to the U.S. money market and the U.S. interest rate. Then, incorporate that change in the table by increasing or decreasing the U.S. interest rate.
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Question 15.5

Contractionary monetary policy in Japan would shift the supply of real money balances to the left, increasing the Japanese interest rate. An increase in the Japanese interest rate would shift the expected dollar return foreign deposits to the right, leading to a depreciation of the dollar relative to the yen as the equilibrium exchange rate moves right along the horizontal axis.
Consider what a contractionary Japanese monetary policy would do to the Japanese money market and the Japanese interest rate. Then, incorporate that change in the table by increasing or decreasing the Japanese interest rate.
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