## NETWORK

1. (PPP) Find the price of some of your favorite books or CDs on Amazon.com in the United States. Now find the price of the same items at Amazon.co.uk in the United Kingdom. Are there arbitrage opportunities? What if you ordered 100 or 1,000 items? What are the shipping costs as a fraction of the cost of your order? How would you determine the tariffs and duties you would need to pay? Are there any other barriers to trade?
2. (PPP) In certain years, the EU accession countries faced appreciation and/or inflation pressure. In March 2007 a step was taken to resolve these problems in the case of the Slovak koruna. The EU gave permission for Slovakia to “bend the rules” a bit. Which one of the Maastricht criteria was relaxed? Use the Internet to find out (Hint: Search the Internet for “Slovak koruna”). What does this say about the importance that EU authorities attach to low inflation? Suppose Slovakia was still relatively poor but in the Eurozone. The Balassa-Samuelson effect would still be present even with a common currency, so how would inflation rates differ in the rich and poor parts of Europe? Why could that be a problem for ECB policy makers?
3. (UIP) Imagine you are a carry trader. Go to the ft.com site and locate the “Market data” part of the site. Find one-month LIBOR interest rates for some major currencies: U.S. dollar, pound, euro, Japanese yen, Swiss franc, Canadian dollar, and Australian dollar (Hint: Search “ft.com money rates”). Find the lowest-yield currency, and call it X. How much interest would you pay in X units after borrowing 100X for one month? (Hint: The raw data are annualized rates.) Compute the exchange rate between X and every other higher-yield currency Y (Hint: Search “ft.com cross rates”). For each Y, compute how much 100X would be worth in Y units today, and then in a month’s time with Y-currency interest added. Revisit this question in a month’s time, find the spot rates at that moment, and compute the resulting profit from each carry trade. Did all your imaginary trades pay off? Any of them?