Prticipation Quiz

Exchange Rates

The world is back on the gold standard. The US central bank will convert US dollars into gold at a rate of $6/oz. The European Central Bank will convert gold at €5/oz.

1. What is the theoretical direct (US dollars per Euro) cross-exchange rate between the US and the Euro zone?

The market cross exchange rate is currently €0.67/$.

2. Which currency is undervalued relative to the other currency?

You have $1,000, but you need to switch to euros in order to import European goods.

3. What is the simple (fastest) way to get euros (i.e. go to the banks and get gold, or go to the market and do a direct exchange). If you go the “fastest” route, how many euros do you end up with?

4. Now, go the “longer” route. How many euros do you end up with?

Comparative Advantage

There are two countries in the world. There are also only two different types of goods produced, food and clothing. Each country has the same amount of “inputs” (i.e. labor, capital, raw materials, etc.), which amounts to 100,000 units of input. Below is a chart that lists out how many units of output each country could create if they created just one type of good. For example, if Country A produced ONLY food, then with 100,000 units of input they could produce 300,000 pounds of food.

1. Which country has the relative comparative advantage of producing food? Why?

2. Which country has the relative comparative advantage of producing clothing? Why?

3. Ignoring the numbers in the above chart (i.e. think conceptually) if the slope for country B’s food production is steeper than country A’s food production, then which country has the relative comparative advantage in producing food?

Options

1. If you strongly believe the market is about to go down, which option should you buy or sell?

2. Use the below information to calculate your profit/loss if you own a long call and the option just matured (reached its expiration):

Spot: 99

Strike: 100

Call premium: $3