GBE PS2
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# Quick Reference Guide - Problem Set 2
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## Running the Solutions
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### Option 1: Run All Problems
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```bash
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python run_all_problems.py
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```
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### Option 2: Run Individual Problems
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```bash
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python problem1_part1_analysis.py # Problem 1, Part 1
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python problem1_part2_switzerland.py # Problem 1, Part 2 (requires internet)
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python problem2_forward_rate.py # Problem 2
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python problem3_put_option.py # Problem 3
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python problem4_money_demand.py # Problem 4
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```
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---
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## Quick Answer Reference
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### Problem 1: Exchange Rates
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- **Part 1:** Yen is riskier (amplifies portfolio risk)
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- **Part 2:** CHF fixed to USD during Bretton Woods (1944-1973)
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### Problem 2: Forward Exchange Rate
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- **F_1y_USD/EUR:** 0.9982
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- **Movement:** USD depreciates 2.43%
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- **R_1y_EUR:** 2.51%
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### Problem 3: Put Option
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- **E_e:** 0.9425 CHF/EUR
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- **E = 0.93:** Exercise, Payoff = 12.50, Profit = -62.88
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- **E = 0.98:** Don't exercise, Payoff = 0, Profit = -75.37
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### Problem 4: Money Demand
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1. **R_CHF:** 1.0%
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2. **E_CHF/EUR:** 1.058
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3. **Expected movement:** CHF depreciates 4.00%
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4. **See diagrams**
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5. **New equilibrium:** R_1 = 4.0%, E_1 = 1.089
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6. **See diagrams**
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7. **M^s,1:** 350 (no change in R or E with accommodation)
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---
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## Key Formulas
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### Exchange Rates
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```
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Forward Rate: F = E + (Points/10,000)
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CIP: F/E = (1 + R_domestic)/(1 + R_foreign)
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UIP: E_e/E = (1 + R_domestic)/(1 + R_foreign)
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```
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### Money Market
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```
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Equilibrium: M^s/P = L(R,Y)
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Problem 4: L = 100 + 1.5×Y - 5000×R
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```
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### Options
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```
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Put Payoff: max(X - E, 0) × Amount
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Profit: Payoff - Premium × (1 + R)
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Exercise: if X > E (strike > spot)
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```
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---
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## Files Generated
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### Scripts (6 files)
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- `problem1_part1_analysis.py`
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- `problem1_part2_switzerland.py`
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- `problem2_forward_rate.py`
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- `problem3_put_option.py`
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- `problem4_money_demand.py`
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- `run_all_problems.py`
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### Graphics (5 files)
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- `switzerland_exchange_rate.png`
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- `problem3_put_option_diagrams.png`
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- `problem4_part4_initial.png`
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- `problem4_part4_no_accommodation.png`
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- `problem4_part6_accommodation.png`
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### Documentation (3 files)
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- `README.md` - Full documentation
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- `ANSWER_SUMMARY.md` - Complete solutions
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- `QUICK_REFERENCE.md` - This file
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---
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## Installation
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```bash
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# Install required packages
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pip install pandas matplotlib requests numpy
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# Or if using the virtual environment
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.venv/bin/pip install pandas matplotlib requests numpy
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```
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---
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## Problem Breakdown
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| Problem | Topic | Points | Key Concepts |
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|---------|-------|--------|--------------|
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| 1.1 | Risk Analysis | 5 | Portfolio theory, covariance |
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| 1.2 | Data Analysis | 8 | Fixed vs floating rates |
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| 2 | Forward Rates | 15 | CIP, interest differentials |
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| 3 | Options | 20 | Put options, payoff diagrams |
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| 4 | Money Demand | 50 | UIP, money market equilibrium |
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---
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## Common Issues
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### Problem 1.2 (FRED Data)
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- **Issue:** Can't fetch data
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- **Solution:** Check internet connection, FRED may be temporarily down
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### Graphics Not Displaying
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- **Issue:** Plots don't show
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- **Solution:** Files are saved as PNG - view them directly
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### Import Errors
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- **Issue:** Module not found
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- **Solution:** Run `pip install pandas matplotlib requests numpy`
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---
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## Understanding the Economics
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### Why does dollar depreciate in Problem 2?
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Higher US interest rates (5%) vs Eurozone (2.51%) → Higher inflation expected → Currency depreciates
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### Why not exercise in Problem 3.3?
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Market rate (0.98) > Strike (0.9425) → Better to sell at market rate than strike price
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### Why does CHF appreciate in Problem 4.5?
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Output ↑ → Money demand ↑ → Interest rate ↑ → Capital inflows → Currency appreciates
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### Why no change in Problem 4.7?
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Central bank increases money supply → Prevents interest rate from rising → No exchange rate change (via UIP)
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---
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## Point Distribution
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- Problem 1: **13 points** (5 + 8)
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- Problem 2: **15 points** (4 + 4 + 4 + 3)
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- Problem 3: **20 points** (7 + 7 + 6)
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- Problem 4: **50 points** (5 + 5 + 5 + 10 + 10 + 10 + 5)
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**Total: 100 points** (some problems labeled with original point values may differ)
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---
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## Tips for Success
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1. **Understand the notation:**
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- E_CHF/EUR = CHF per EUR (direct quote)
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- Higher E = CHF depreciation
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- Lower E = CHF appreciation
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2. **Know when to exercise options:**
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- Put: Exercise if Strike > Spot (X > E)
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- Call: Exercise if Spot > Strike (E > X)
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3. **Interest parity intuition:**
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- High interest rate → Expected depreciation
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- Compensates investors for currency risk
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4. **Money market mechanics:**
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- Output ↑ → Money demand ↑ → Rate ↑
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- Money supply ↑ → Rate ↓
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- Accommodation = keeping rate constant
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---
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## Getting Help
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1. **Read the README.md** for comprehensive documentation
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2. **Check ANSWER_SUMMARY.md** for detailed solutions
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3. **Review the generated graphs** for visual understanding
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4. **Run individual problems** to focus on specific topics
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---
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*Good luck with your Global Business Environment course!*
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