Homework 4 2015

Homework 4 (based on chapter 31) 1. Suppose that euro will depreciate (towards other currencies) next year. How would the following groups be affected? Will they be happy or unhappy? a) Polish tourists planning to go for vacation to Spain (or Italy) next year. b) German tourists planning to visit Kraków (and Poznań) next year. c) French importers of polish mushrooms and wine. d) Russian and Ukrainian oligarchs holding large part of their wealth in euro banknotes deposited in Swiss banks. e) US pension funds who have invested in European stock markets (shares quoted in euro, of course) f) Spanish producers of tomatoes and red pepper. g) Polish producers of furniture (exporting a lot to the eurozone). 2.

Provide 3 examples of goods (or services) for which the law of one price is likely to hold, and 3 goods for which it is likely not to hold. Explain why?

3.

The price of wheat produced in Poland is 600zł (per 1 ton), and the price of identical wheat produced in Germany is 200€. The nominal exchange rate is 0.25€/1zł. Assume that there are absolutely no barriers to trade between Poland and Germany (no transportation costs, no tariffs etc.). a) Calculate the real exchange rate for Poland. b) Is it possible to make a profit from this situation? Calculate how much you can earn (on 1 ton)? What would you have to do? Is it possible to take advantage of this opportunity if you live far away (for example, in Japan)? c) If many people (traders) exploit this opportunity for arbitrage, what will happen to prices of wheat in both countries? Could you provide an example of equilibrium prices of wheat, i.e. prices that (given the nominal exchange rate of 0.25€/1zł) satisfy the law of one price? d) Is it possible that not only prices of wheat, but also the nominal exchange rate will be affected by this arbitrage? If so, how (appreciation of zł, or depreciation of zł)?

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International Business