Atlas/Global Business Environment/Problem Set 2/QUICK_REFERENCE.md

Quick Reference Guide - Problem Set 2

Running the Solutions

Option 1: Run All Problems

python run_all_problems.py

Option 2: Run Individual Problems

python problem1_part1_analysis.py    # Problem 1, Part 1
python problem1_part2_switzerland.py # Problem 1, Part 2 (requires internet)
python problem2_forward_rate.py      # Problem 2
python problem3_put_option.py        # Problem 3
python problem4_money_demand.py      # Problem 4

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Quick Answer Reference

Problem 1: Exchange Rates

• Part 1: Yen is riskier (amplifies portfolio risk)
• Part 2: CHF fixed to USD during Bretton Woods (1944-1973)

Problem 2: Forward Exchange Rate

• F_1y_USD/EUR: 0.9982
• Movement: USD depreciates 2.43%
• R_1y_EUR: 2.51%

Problem 3: Put Option

• E_e: 0.9425 CHF/EUR
• E = 0.93: Exercise, Payoff = 12.50, Profit = -62.88
• E = 0.98: Don't exercise, Payoff = 0, Profit = -75.37

Problem 4: Money Demand

1. R_CHF: 1.0%
2. E_CHF/EUR: 1.058
3. Expected movement: CHF depreciates 4.00%
4. See diagrams
5. New equilibrium: R_1 = 4.0%, E_1 = 1.089
6. See diagrams
7. M^s,1: 350 (no change in R or E with accommodation)

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Key Formulas

Exchange Rates

Forward Rate: F = E + (Points/10,000)
CIP: F/E = (1 + R_domestic)/(1 + R_foreign)
UIP: E_e/E = (1 + R_domestic)/(1 + R_foreign)

Money Market

Equilibrium: M^s/P = L(R,Y)
Problem 4: L = 100 + 1.5×Y - 5000×R

Options

Put Payoff: max(X - E, 0) × Amount
Profit: Payoff - Premium × (1 + R)
Exercise: if X > E (strike > spot)

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Files Generated

Scripts (6 files)

• problem1_part1_analysis.py
• problem1_part2_switzerland.py
• problem2_forward_rate.py
• problem3_put_option.py
• problem4_money_demand.py
• run_all_problems.py

Graphics (5 files)

• switzerland_exchange_rate.png
• problem3_put_option_diagrams.png
• problem4_part4_initial.png
• problem4_part4_no_accommodation.png
• problem4_part6_accommodation.png

Documentation (3 files)

• README.md - Full documentation
• ANSWER_SUMMARY.md - Complete solutions
• QUICK_REFERENCE.md - This file

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Installation

# Install required packages
pip install pandas matplotlib requests numpy

# Or if using the virtual environment
.venv/bin/pip install pandas matplotlib requests numpy

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Problem Breakdown

Problem	Topic	Points	Key Concepts
1.1	Risk Analysis	5	Portfolio theory, covariance
1.2	Data Analysis	8	Fixed vs floating rates
2	Forward Rates	15	CIP, interest differentials
3	Options	20	Put options, payoff diagrams
4	Money Demand	50	UIP, money market equilibrium

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Common Issues

Problem 1.2 (FRED Data)

• Issue: Can't fetch data
• Solution: Check internet connection, FRED may be temporarily down

Graphics Not Displaying

• Issue: Plots don't show
• Solution: Files are saved as PNG - view them directly

Import Errors

• Issue: Module not found
• Solution: Run pip install pandas matplotlib requests numpy

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Understanding the Economics

Why does dollar depreciate in Problem 2?

Higher US interest rates (5%) vs Eurozone (2.51%) → Higher inflation expected → Currency depreciates

Why not exercise in Problem 3.3?

Market rate (0.98) > Strike (0.9425) → Better to sell at market rate than strike price

Why does CHF appreciate in Problem 4.5?

Output ↑ → Money demand ↑ → Interest rate ↑ → Capital inflows → Currency appreciates

Why no change in Problem 4.7?

Central bank increases money supply → Prevents interest rate from rising → No exchange rate change (via UIP)

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Point Distribution

• Problem 1: 13 points (5 + 8)
• Problem 2: 15 points (4 + 4 + 4 + 3)
• Problem 3: 20 points (7 + 7 + 6)
• Problem 4: 50 points (5 + 5 + 5 + 10 + 10 + 10 + 5)

Total: 100 points (some problems labeled with original point values may differ)

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Tips for Success

1. Understand the notation:

   • E_CHF/EUR = CHF per EUR (direct quote)
   • Higher E = CHF depreciation
   • Lower E = CHF appreciation

2. Know when to exercise options:

   • Put: Exercise if Strike > Spot (X > E)
   • Call: Exercise if Spot > Strike (E > X)

3. Interest parity intuition:

   • High interest rate → Expected depreciation
   • Compensates investors for currency risk

4. Money market mechanics:

   • Output ↑ → Money demand ↑ → Rate ↑
   • Money supply ↑ → Rate ↓
   • Accommodation = keeping rate constant

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Getting Help

1. Read the README.md for comprehensive documentation
2. Check ANSWER_SUMMARY.md for detailed solutions
3. Review the generated graphs for visual understanding
4. Run individual problems to focus on specific topics

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Good luck with your Global Business Environment course!