Assignment No 2 (Due on Tuesday 21 March)

1. (20 marks) Refer to the lower part of p.107 of the textbook and answer the
following questions:

(a) Was China experiencing a net capital inflow or outflow in 2009 and
2015, respectively, and to what amount of USDs?

(b) What is the basic/overall balance in 2009 and 2015, respectively,

according to China’s BOP statements?

2. (50 marks) Suppose that the United Arab Emirates has the following
import/export prices and volumes. It undertakes a major “devaluation” of
the UAE dirham (AED) against one of its trading partner currencies, the
euro (EUR or €). For ease of the numerical analysis, assuming that the
UAE will “revalue” euro by increase its value by 6% against AED.

Questions: (a) What are the trade balances at 3 time points, if they are
required to be expressed in EURs? (1) before the devaluation. (2) Shortly
after the devaluation, supposing that the importers fully pass the impact of
the devaluation onto their customers (i.e., there is no partial pass-through).
And (3) after the import quantity has adjusted based on the price elasticity
of demand.

(b) Has the trade balance in the UAE been improved after the devaluation?
Elaborate your answers by using the information of trade balances that you
calculate in Part (a) of this question.
Initial exchange rate (EURAED) 4.2
Price of exports (AED) 100
Price of imports (€) 120
Quantity of exports 300 billion
Quantity of imports 200 billion
Price elasticity of demand, exports 2

Hint: To answer this question you’re suggested to use the following two
equations:

1
 UAE Trade Balance = (𝑃𝑋𝐿𝐶 ÷ 𝑆𝐿𝐶/𝐹𝐶 × 𝑄𝑋 ) − (P𝐹𝐶
𝑀 × 𝑄𝑀 ), and

%Δ𝑄𝑑
Price elasticity of demand = 𝑒𝑃 = | |
%Δ𝑃

3. (30 marks) A Switzerland company, Vitol, signs a forward contract with

the Credit Suisse Group AG for purchasing USD 1 mil and paying Swiss
Francs (CHF) in Sep for the rate of 0.9202 (USDCHF = 0.9202), where the
value date is on 14th September. On the value date, the spot USDCHF rate
becomes 0.9135.

Questions: (a) Supposing that the transaction is specified as a deliverable

forward (DF) contract. What are the relevant cashflows-cash inflows
and/or outflows in which currencies - for Vitol in regards to the DF contract
on the value date?

(b) Supposing that the transaction is specified as a non-deliverable forward

(NDF) contract. What are the relevant cashflows - cash inflows and/or
outflows in which currencies - for Vitol in regards to the NDF contract on
the value date?

Note for the format of answers and for enquiries to the assignment:
(1) Please type your answers in a Word document with clear mathematical
statements. It is Ok if you provide answers including parts of Excel
spreadsheet, in this case please make sure you explain the
calculations/steps clearly.

(2) For any enquires regarding the meaning of the questions, please put them
up here under the Discussion Forum of this assignment. Your enquiries
will also be put up there if you e-mail them to the lecturer or TA(s). To
ensure the Class having symmetric information, please note that we won’t
respond to anonymous enquiries.