dealer rate: CHF/EUR 1.0741/1.0746 (bid/offer)

market rate:

bid

CHF/USD = (1/1.0456) / (1/1) = 0.9564 (must take the inverse)

USD/EUR = 1.1241 , so CHF/EUR = 1.0751

offer

CHF/USD = (1/1.0543) / (1/1) = 0.9567

USD/EUR = 1.1243 , so CHF/EUR = 1.0756

arbitrage opportunity, buy 1.0746 from dealer and sell 1.0751 to market

2) Uncovered interest rate parity

Ff/d = Sf/d (1+rf) / (1+rd)

or in another form:

(1+rd) = (1+rf) Sf/d / Ff/d

3) find mark to market value of forward position

The guy sold 20mil euro forward, USD/EUR = 1.1716

now to calculate mark to market, he needs to buy back euro, so use offer rate (because market sells to him)

forward point (USD/EUR) 35/36 (bid/offer)

1.1243 + 0.0036 = 1.1279 USD/EUR

20mil * (1.1716-1.1279) = $874,000

PV 874,000 / (1 + 0.0053 (180/360)) = $871,690

0.0053 is LIBOR (USD)

4) Growth model

Under classical model, Growth in real GDP is temporary- population explosion will occur and stop the growth.

Under neoclassical model, TFP impact the growth rate of output per worker, but capital deepening has no effect on the long term growth of the economy. This can be captured by understanding that in the neoclassical model, there are

2) Uncovered interest rate parity

Ff/d = Sf/d (1+rf) / (1+rd)

or in another form:

(1+rd) = (1+rf) Sf/d / Ff/d

3) find mark to market value of forward position

The guy sold 20mil euro forward, USD/EUR = 1.1716

now to calculate mark to market, he needs to buy back euro, so use offer rate (because market sells to him)

forward point (USD/EUR) 35/36 (bid/offer)

1.1243 + 0.0036 = 1.1279 USD/EUR

20mil * (1.1716-1.1279) = $874,000

PV 874,000 / (1 + 0.0053 (180/360)) = $871,690

0.0053 is LIBOR (USD)

4) Growth model

Under classical model, Growth in real GDP is temporary- population explosion will occur and stop the growth.

Under neoclassical model, TFP impact the growth rate of output per worker, but capital deepening has no effect on the long term growth of the economy. This can be captured by understanding that in the neoclassical model, there are

*diminishing returns to capital.*Furthermore,*changes in savings, labor force growth rate impact only the level of output per worker but do not impact growth rate of output per worker.*

In the endogenous growth model, returns to capital can be constant. Therefore in the endogenous growth theory, as savings increase (savings are closely tied to capital investment), the growth rate can keep increasing.

If question asks: “Under which theory would R&D expenditures have a long term impact on growth” it would be Endogenous. The idea being that this form of capital expenditure can actually have an impact on Total Factor Productivity.