University of Illinois at Urbana-Champaign Econ 426, Department of Economics
Aram Grigoryan
Project 2
ECON426 – Monetary Economics
Due Nov 24th
1. (20 points) Exchange Rates: Calculate the answers in Jupyter notebook
(a) Suppose the exchange rate for EUR/USD is 1.13 Usd/EUR. If the German price for Big Mac is 2.5 euros and the U.S. price is $3.40, then what will be the real exchange rate in USA?
(b) Suppose Chrysler buys car components worth e16 million from the German subsidiary of Daimler AG. The equipment is to be delivered to the US and paid in one year. Current interest rate for T-bills is 8%, whereas equivalent bonds give 6% in EU. When Chrysler converts US dollars to Euros today and invests in Eurobonds, what will be the amount of dollars needed today?
(c) If Chrysler enters a forward contract, and agrees to buy dollars with an exchange rate of e1=$1.2 in a year, what will the amount needed in USD today?
(d) In order the investment amounts to be equivalent, what the forward rate for $1 in terms of euros should be?
2. (20 points) During the class we derived the payoff for Call and Put Options. Write a program that calculates the payoff for the buyer and the seller of each option given the price, strike price, exercise
date and the interest rate.
(a) Plot the payoff for the buyer of the European call option with strike price $100 and option price $5. Exercise date is 3 months from now and the interest rates in the economy are 6% yearly.
(b) Consider the case where you bought a call option for $5 and you can sell a similar call option for $4 and strike price $102. Plot your payoff with different spot prices.
3. (20 points)Assume the futures prices for oil are as given in Table 1
Table 1: Futures prices per barrel Calculate the net convenience yield for each period.
4. (20 points) Suppose the spot price of company A¡¯s share is $80 in the market. It can change ¡À20% in a month with equal probabilities. How much is the price of European call option with strike price of $80, given the annual risk free interest rate is 5%? How the price will change if the likely changes are now ¡À10%. What will happen to the price of the call option if the probability of decrease in price is 1/3 instead of 1/2.
5. (20 points) Using quandl database, download the data for Fed funds rate(FRED/DFF), Primary Credit Rate(FRED/DPCREDIT), Unemploymen Rate(UNRATE) and the CPI(FRED/CPIAUCSL) from 2007 till 2020 September.
Maturity
October
December
June (2019)
December (2019)
Futures price
117.5
119.6
122.66
123.49
Risk free rates
0.0415
0.05
0.0514
0.0507
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(a) Make the frequency of all the data quarterly and plot them in one figure.
(b) Create the correlation analysis of the series, using Series.corr method in pandas
(c) compute the short run correlation between unemployment rate and the cpi for every one year period and plot the results(rolling, for each date take the past 4 points of the two series). When do this appear to be the highest in absolute terms?
(d) repeat the previous step, but now for 10 quarters. Is the relation stronger/weaker?
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