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    Problem Set 4 Answers

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    sandrae brown
    This document contains the answers to Problem Set 4 in an economics course. It first provides scenarios where the exchange rate between the Jamaican dollar and Guyanese dollar changes by 1-4% and asks to calculate the new exchange rates. It also asks to explain the reasons for the changes in a market diagram. It then asks whether a Guyanese businessman would invest in a 6% returning Jamaican asset or 4% returning Guyanese asset based on expected future exchange rates. It works through examples where the Jamaican dollar is expected to appreciate or depreciate against the Guyanese dollar.

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    Problem Set 4 Answers

    Uploaded by

    sandrae brown
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    This document contains the answers to Problem Set 4 in an economics course. It first provides scenarios where the exchange rate between the Jamaican dollar and Guyanese dollar changes by 1-4% and asks to calculate the new exchange rates. It also asks to explain the reasons for the changes in a market diagram. It then asks whether a Guyanese businessman would invest in a 6% returning Jamaican asset or 4% returning Guyanese asset based on expected future exchange rates. It works through examples where the Jamaican dollar is expected to appreciate or depreciate against the Guyanese dollar.

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    This document contains the answers to Problem Set 4 in an economics course. It first provides scenarios where the exchange rate between the Jamaican dollar and Guyanese dollar changes by 1-4% and asks to calculate the new exchange rates. It also asks to explain the reasons for the changes in a market diagram. It then asks whether a Guyanese businessman would invest in a 6% returning Jamaican asset or 4% returning Guyanese asset based on expected future exchange rates. It works through examples where the Jamaican dollar is expected to appreciate or depreciate against the Guyanese dollar.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    65 views1 page

    Problem Set 4 Answers

    Uploaded by

    sandrae brown
    This document contains the answers to Problem Set 4 in an economics course. It first provides scenarios where the exchange rate between the Jamaican dollar and Guyanese dollar changes by 1-4% and asks to calculate the new exchange rates. It also asks to explain the reasons for the changes in a market diagram. It then asks whether a Guyanese businessman would invest in a 6% returning Jamaican asset or 4% returning Guyanese asset based on expected future exchange rates. It works through examples where the Jamaican dollar is expected to appreciate or depreciate against the Guyanese dollar.

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    of 1

    ECON 20031

    Problem Set 4 - Answers

    1. Assume that JMD$ 1.00 = GYD $ 2.00. In each scenario below you are asked
    to find the new value of the Jamaican Dollar (JMD). You will always start a new
    calculation using the original exchange rate given above. Further, you are required
    to arrive at a possible explanation for each change and illustrate same on a diagram
    of the market for Jamaican Dollars. Note that GYD stands for Guyana Dollars.

    (a) The JMD depreciates by 1%.


    JMD$ 1.00 = GYD $ 1.98
    (b) The JMD depreciates by 3%.
    JMD$ 1.00 = GYD $ 1.94
    (c) The JMD appreciates by 2%.
    JMD$ 1.00 = GYD $ 2.04
    (d) The JMD appreciates by 4%.
    JMD$ 1.00 = GYD $ 2.08

    NB: For a depreciation the demand for JMD could fall, or the supply of
    JMD will rise. For an appreciation the demand for JMD will increase,
    or the supply of JMD will fall. In each case the story will focus on one
    of these.
    2. A Guyanese businessman is contemplating investing his money in a Jamaican fi-
    nancial asset which gives a return of 6%. A similar asset in Guyana gives a return
    of 4%. Note that to invest in Jamaica the Guyanese businessman will have to buy
    JMDs. He will then resell the JMDs for GYDs at the time the asset matures. Based
    on the expectations of the value of the exchange rate at the maturity of said asset
    you are required to say whether or not the businessman will invest in the asset. In
    each case your calculations will be based on the initial exchange rate of JMD $1.00
    = GYD $2.00. For simplicity, it has been assumed that the businessman is unable
    to purchase foreign exchange on the forward market. You may, if needed, use a
    simple interest approach and assume that the period of investment is one.
    (a) The value of the JMD is expected to be GYD $2.06.
    Since the JMD appreciates and the interest rate is greater in Jamaica
    then clearly the businessman will invest in Jamaica. Note that 6%
    return and a 3% appreciation yields an approximate return of 9% in
    terms of GYD. To see how this is so JMD $100 (GYD $200) yields
    JMD $106. And JMD $106 gives GYD $218.36 at the new exchange
    rate, so in GYDs the businessman, having started our with GYD
    $200 has earned approximately 9%.
    (b) The value of the JMD is expected to be GYD $1.98.
    The JMD depreciates by 1% so the businessman gets approximately
    5% return on his GYD. He will still invest in Jamaica.
    (c) The value of the JMD is expected to be GYD $1.90. The JMD depreciates
    by 5% so the businessman gets approximately 1% return on his GYD.
    He is better off investing his money in Guyana where he will get a
    4% return.
    1
    Department
    c of Economics, The University of the West Indies (Mona).

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