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Subject 1: Exchange Rates and International Finance (35%) a. The following table reports the nominal exchange rate of the US dollar against two other American currencies (Canadian dollar and Mexican pesos) on 31/12/2021. It also presents the inflation rates' forecasts for the next 1-year period (estimated by the OECD), as well as the 1- year government bond yield (in %) for both countries. Exchange rate Inflation rates' l-year government forecasts (%) bond yield (%) USA 4.78 0.38 Canadian dollar (CAD) 1.27 3.25 0.76 Mexican peso (MXN) 20.46 4.43 6.92 You are a US citizen and you want to invest $300,000 to a 1-year government bond. Which country is the best to invest money in? (Mark 1.5) b. Mr. Garamond, the owner of a small publishing house in Bologna, plans to invest 2.5 million euros for one year, and he thinks to buy either a US bond with interest rate 0.38% or an Italian bond with interest rate -0.49%. Note also that today's euro nominal exchange rate per $ equals 0.876. i. If Mr. Garamond expects annual appreciation of the euro by 3.5%, what will be his choice? Comment on your answer (Mark: 0.7) ii. Which expectations' scheme regarding the exchange rate will make Mr. Garamond indifferent between the two alternatives? (Mark: 0.8) c. Since 1986, The Economist has developed the 'Big Mac Index, as an example of the law of one price. This index serves as a comparison (but not perfect) point as to whether currencies are overvalued or undervalued. On January 31, 2022, a Big Mac costs $5.81 in the USA and 4,600 won in South Korea. Is the won overvalued or undervalued? [Hint: Use official international data sources, such as FED, IMF etc. when required]. (Mark: 0.5) Note: Round your answers up to the third decimal point. Subject 1: Exchange Rates and International Finance (35%) a. The following table reports the nominal exchange rate of the US dollar against two other American currencies (Canadian dollar and Mexican pesos) on 31/12/2021. It also presents the inflation rates' forecasts for the next 1-year period (estimated by the OECD), as well as the 1- year government bond yield (in %) for both countries. Exchange rate Inflation rates' l-year government forecasts (%) bond yield (%) USA 4.78 0.38 Canadian dollar (CAD) 1.27 3.25 0.76 Mexican peso (MXN) 20.46 4.43 6.92 You are a US citizen and you want to invest $300,000 to a 1-year government bond. Which country is the best to invest money in? (Mark 1.5) b. Mr. Garamond, the owner of a small publishing house in Bologna, plans to invest 2.5 million euros for one year, and he thinks to buy either a US bond with interest rate 0.38% or an Italian bond with interest rate -0.49%. Note also that today's euro nominal exchange rate per $ equals 0.876. i. If Mr. Garamond expects annual appreciation of the euro by 3.5%, what will be his choice? Comment on your answer (Mark: 0.7) ii. Which expectations' scheme regarding the exchange rate will make Mr. Garamond indifferent between the two alternatives? (Mark: 0.8) c. Since 1986, The Economist has developed the 'Big Mac Index, as an example of the law of one price. This index serves as a comparison (but not perfect) point as to whether currencies are overvalued or undervalued. On January 31, 2022, a Big Mac costs $5.81 in the USA and 4,600 won in South Korea. Is the won overvalued or undervalued? [Hint: Use official international data sources, such as FED, IMF etc. when required]. (Mark: 0.5) Note: Round your answers up to the third decimal point

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