Bfw 3331 Question 1

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Question 1

Part 1

Date RMB/EU RMB/USD RMB/JPY

2005 1.8272 -2.8588 1.2945

2006 -0.6262 -9.1104 0.9191

2007 0.4827 -10.9713 4.2882

2008 -2.4116 -15.9485 3.0385

2009 -7.9538 -20.4057 -1.1106

2010 -6.0603 -19.4300 3.4037

2011 -6.6725 -22.0991 5.8165

2012 -11.4381 -26.7300 2.8581

2013 -12.5396 -28.4356 2.4232

Sum -45.3921 -155.9894 22.9312

Overall Average -5.0436 -17.3322 2.5479

Table 1

Table 1 shows that the average over or undervaluation of the RMB for the years 2005, 2006,

2007, 2008, 2009, 2010, 2011, 2012 and 2013; and the overall average over or

undervaluation of the RMB against the three said currencies.

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Graph A

From the graph above, it can be seen that European Union economy had experience of

deflation in year 2005 which led to lower growth (Pettinger, 2008). When the prices are

falling, consumers are reluctant to spend money because they may predict that prices will

even cheaper in the future and lead to delay purchasing. On the other hand, United States had

the highest inflation rate overall among the three countries. A high inflation rate will destroy

the real value of money. As such, inflation reduces the value of savings and investments

because savers and investors said to be worse off and this could lead to a redistribution of

income in the society. It also brings impacts on the economy of the particular country. For

example, it may cause the exports to be uncompetitive as well as affecting the real exchange

rates as the value of that currency has been depreciated.

-0.0500

0.0000

0.0500

0.1000

0.1500

0.2000

0.2500

0.3000

2005 2006 2007 2008 2009 2010 2011 2012 2013

A v e r a g e I n f l a t i o n R a t e

Year

Average Inflation Rate of United States,

European Union and Japan on Yearly Basis

EU

US

JPY

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Graph B

Under the RMB/ USD peg system, China has experienced a dramatic growth since 1995.

However, RMB was undervalued by an average of 0.7214% (see appendix 5) against the

USD in real terms for the first half of 2005 which is the period before de-pegging in July

2005. Studies show that the de-pegging supposed to have corrected the undervaluation of

RMB/USD in real terms. It corrected the undervaluation of RMB against USD in the real

terms. RMB was overvalued by an average of 0.7972% (see appendix 5) against the USD in

real terms for the second half of 2005 which is the period after de-pegging. According to the

findings in Table 1, there is a gradually depreciation trend of RMB and has been undervalued

against the USB by an overall average of 17.3322%. The real exchange rate for RMB against

USD is continuously found to be undervalued. Graph A shows the nominal and real exchange

rates for RMB against USD. Based on the graph above, it can be seen that the real exchange

rate fluctuated throughout the period of analysis. It appeared to be lower than the nominal

exchange rate. A lower real exchange rate indicates that the USD is able to buy more RMB

than what it should be in real terms. This specifies that there is an undervaluation of RMB.

Hence, RMB/USD can be said to be not in exchange rate equilibrium due to the devaluation

by an overall average of 17.3322%.

0.0000

1.0000

2.0000

3.0000

4.0000

5.0000

6.0000

7.0000

8.0000

9.0000

2005 2006 2007 2008 2009 2010 2011 2012 2013

A v e r a g e E x c h a n g e R a t e s

Year

Average Nominal and Real Exchange Rates of

RMB/ USD on Yearly Basis

Nominal Exchange Rate

Real Exchange Rate

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Graph C

Before RMB/USD de-pegging which is the first half of 2005, RMB was overvalued against

the EUR by an average of 2.7943% (see appendix 6). For the second half of 2005 which is

after the RMB/USD de-pegging, RMB was also overvalued against EUR by an average of

0.3766% (see appendix 6). According to the findings in Table 1, there is a gradually

depreciation trend of RMB and has been undervalued against the EUR by an overall average

of 5.0436% The real exchange rate for RMB against EUR is continuously found to be

undervalued despite of the nominal exchange rate of the two currencies has slowly increased

after RMB/USD de-pegged. Graph C shows the nominal and real exchange rates for RMB

against EUR. Based on the graph above, it can be seen that the real exchange rate fluctuated

throughout the period of analysis. The real exchange rate appeared to be higher than the

nominal exchange rate in 2009 to 2012. A high real exchange rate indicates that the EUR is

unable to buy more RMB than what it should be in real terms. For the rest of years, it was

below the nominal exchange rate. A lower real exchange rate indicates that the EUR is able

to buy more RMB than what it should be in real terms. This specifies that there is an

undervaluation of RMB. Hence, RMB/USD can be said to be not in exchange rate

equilibrium due to the devaluation by an overall average of 5.0436%.

9.4000

9.6000

9.8000

10.0000

10.2000

10.4000

10.6000

10.8000

2005 2006 2007 2008 2009 2010 2011 2012 2013


Year


RMB/EUR on Yearly Basis


Real Exchange Rate

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Graph D

Before RMB/USD de-pegging which is the first half of 2005, RMB was overvalued against

the JPY by an average of 1.6261% (see appendix 7). For the second half of 2005 which is

after the RMB/USD de-pegging, RMB was undervalued against JPY by an average of 0.7972%

(see appendix 7). According to the findings in Table 1, there is a gradually appreciation trend

of RMB and has been overvalued against the JPY by an overall average of 2.5479%. The real

exchange rate for RMB against JPY is continuously found to be overvalued despite of the

nominal exchange rate of the two currencies dropped rapidly right after the de-pegging of

RMB/USD. However, it has slowly increased in year 200. Graph D shows the nominal and

real exchange rates for RMB against JPY. Based on the graph above, it can be seen that the

real exchange rate fluctuated throughout the period of analysis. The real exchange rateappeared to be above the nominal exchange rate in 2005 to 2013. A higher real exchange rate

indicates that the JPY is unable to buy more RMB than what it should be in real terms. This

specifies that there is an overvaluation of RMB. Hence, RMB/ JPY can be said to be just

about in exchange rate equilibrium due to the overvaluation by an overall average of

2.5479%.

0.0580

0.0600

0.0620

0.0640

0.0660

0.0680

0.0700

0.0720

0.07400.0760

0.0780

2005 2006 2007 2008 2009 2010 2011 2012 2013


Year


RMB/JPY on Yearly Basis


Real Exchange Rate

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Graph E

Graph E shows the average under and overvaluation for RMB against USD, EUR and JPY. It

can be clearly seen that the RMB was undervalued against the USD for most of the periods of

analysis even after the de-pegging in July 2005. Hence, de-pegging did not correct the

overvaluation of RMB against USD. The RMB was undervalued against the EUR straight

after de-pegging. On the other hand, RMB was overvalued against JPY for 7 years. RMB

remained overvaluation against the JPY even after de-pegging. In conclusion, RMB was

undervalued against USD and EUR but overvalued against JPY.

-35.0000

-30.0000

-25.0000

-20.0000

-15.0000

-10.0000

-5.0000

0.0000

5.0000

10.0000

2005 2006 2007 2008 2009 2010 2011 2012 2013

A v e r a g e U n d e r a n d O v e r v a l u a t i o n

Year

Average Under and Overvaluation for RMB

against USD, EUR and JPY

RMB/EUR

RMB/USD

RMB/JPY

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Part 2

Studies show that the RMB is undervalued by up to 30% against the other currencies. This

currency value is maintained by imposing foreign exchange controls (Edge, n.d.). For

example, there is a limit to how much foreign currency Chinese residents can buy and China

uses its foreign exchange reserves to buy US dollar assets which reduced the value of

Chinese currency and increase the value of dollar.

The value of RMB could be increased (appreciation) if the Chinese government allows its

currency to rise according to the market demand. Demand for any country’s currency on the

foreign exchange market is determined by demand for that country’s exports of goods and

services and by changes in foreign investment in that country. This is because when

foreigners buy another country’s exports of goods or services they must pay for these in the

currency of the exporting country.When there is an increase in demand for the RMB (demand

curve shifted from D1 to D2), it will cause a rise in the exchange rate and lead to an

appreciation in the RMB and depreciation in the other currencies. The quality of RMB traded

will also increase from Q0 to Q1 (illustrated in graph F).

Exchange

Rate(value of

one RMB

in terms

of USD

Quantity of RMB

Graph F

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On the supply side, supply of any country’s currency on the foreign exchange market is

determined by that country’s imports of goods and services and by its investment in other

countries. When there is a decrease in the supply of RMB will lead to an increase in the value

(appreciation). However, the quantity of RMB traded will also decrease from Q1 to Q2

(illustrated in graph G). The direction in which the value of a currency is heading can cause

cash to flow into or out of that currency. For example, a currency that is appreciating can

cause money to flow into its country’s assets as investors want to benefit from buying on the

currency as the currency’s price rose.

Quantity of RMB

Exchange Rate

(value of one

RMB in terms

of USD

0

Graph G

Appreciation can be defined as the increase in the value of a currency indicating that the

particular currency is worth more in terms of foreign currency (Pettinger, 2014). In order to

know whether the RMB should be further appreciated against the USD, JPY and Euro, the

effects of appreciated will be further discussed.

China has a high proportion of processing trade result in the high manufacturing costs of

imported raw materials, machinery, equipment are other resources. The appreciation of RMB

refer to the increasing price of various domestic resources, especially land and labour, leading

to the changes in value of international and domestic market. It could help to reduce the

prices of imported goods which lead to fully utilization of world resources by the firms and

eventually increase the national as well as enhancing the overall internationalcompetitiveness of the products and services. Domestic enterprises will rely more on sales to

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the domestic market that will form a more reasonable industry structure. RMB appreciation

can bring advantage to industries holding large amount of foreign currency denominated

assets such as aviation industry and industries that need to import raw materials i.e.

petrochemical industry. It also can promote technical innovation. With the appreciation of

RMB, products exported to the world will be technologically innovative to become more

competitive in the global market. It is because China’s production process is enormously

costly in terms of resources of energy whereas the labour cost is cheap.

Furthermore, the appreciation of the RMB also has the effect of reducing inflationary

pressures within the economy through the lower domestic prices of imports. Nevertheless, the

structural change due to appreciation will also contribute to lower the inflation rate in the

long term by increasing efficiency in economic production. This will minimise the need to

tighten monetary policy in order to address inflationary concerns both in the short term and

long term which will eventually lead to a lower interest rates.

In addition, changes in the real exchange rate have implications for China’s cur rent account

deficit. The current account includes the money flow from trade, income and current transfers

for a period of one year. In the short term, an appreciation leads to the valuation effect, a

reduction in the RMB value of foreign debt as well as a lower interest servicing cost of debt.

Besides that, the increase in export prices and the decrease in import prices will initially

cause an increase in domestic consumption of imports and lower foreign demand for exports.

Thus, the current account deficit may deteriorate in the short term.

On the other hand, western countries argued that the appreciation of RMB would have

negative impact on China’s trade as well as affecting the world economy. This can be seen

when appreciation of RMB rose the cost of Chinese export enterprises such as the textile

industry that sell low-cost or low-added value commodities. According to (Mark, 2013), if

RMB appreciates by 1%, the profit of textile industry will be reduced by 2% -6%. If it

appreciates by 5%, the profit will decrease by at least 10% and if the appreciation is over

10%, the textile industry will bear an enormous shock. Besides the companies in China itself,

the suppliers from overseas will be also affected. For example, a Chinese company,

Shuangjin Knitting and Textile (SKT) distributes socks to other US companies such as Wall-

Mart and Adidas. The cost of a pair of socks produced by SKT is only 25 cents. As RMB

appreciates, it imposes a greater burden on SKT and forced the US companies to increase

price as a result as the suppliers have now increased the price (Vincent, 2010). This led to

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drop in sales volume. In this case, both countries’ economies were also affected with the

appreciation of RMB.

However, it is not true that the global trade imbalance results from the RMB exchange rate.

By taking US and China as an example, it proves that the global trade imbalance does not

result from the RMB exchange rate.

Graph H

Graph H shows the US trade in goods with China. It can be seen that although the RMB has

appreciated over 20%, the trade imbalance has become more severe. As such, the large US

current account deficit should not account on the exchange rate, but lies in the historically

low savings rate, large demand of imports and other economic aspects. As a matter of fact,

China RMB accounts for less than 10% weight of the US real effective exchange rate so any

appreciation of RMB would impose an insignificant amount of impact of US trade imbalance.

Some also argued that appreciation of RMB will reduce exports which will lead to slower

growth. Nevertheless, currency appreciation will not necessarily lead to growth slowdown.

Although RMB exchange rate appreciation may lower the price competitiveness of China’s

export, thus brought certain negative effect on China’s growth rate. However, the

appreciation may also cut down the expenses of imported materials that bring benefits to

domestic producers and stimulate investment and economic growth.

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According to (Mark, 2013), effects in long run are more concerned than in the short run. In

most cases, the effects will be much smaller in the long run that reflects the capability and

flexibility of economic individuals’ self -adjustment. The economic agents can adjust their

behaviour and economic activities accordingly when they anticipate in exchange rate

appreciation. This will offset the impact of exchange rate appreciation on macroeconomics.

For example, the appreciation of RMB exchange rate will help to rebalance China’s external

account and the simulation results show that even currency appreciation may has a small

negative effect on fiscal surplus, it will not impact China’s fiscal account in the long run.

In conclusion, the appreciation of RMB encouraged enterprise to improve the industrial

structure and promote growth and development of the service sectors and other industries.

Next, it also improves Chinese industrial and trade structure by enhancing autonomous

innovation ability and allows enterprises to be the technological innovation to balance the

contradiction between national trades and fully utilize the monetary authorities. However, by

appreciating RMB rapidly, it could make the domestic market to be over production due to

supply exceeds demand where the export goods will be sold in the domestic market. As such,

China RMB should be appreciated for gradually against USD, JPY and Euro based on the

advantages as stated above and at the same time would not affect other countries’ trade

imbalance such as US.

(1401 words)

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Question 2

In 1971, the Bretton Woods system of administering fixed foreign exchange rates was

eliminated in favour of market determination of foreign exchange rates where the regime of

fluctuating exchange rates was introduced. Other than market-determined fluctuations, there

was a lot of volatility in other markets around the world due to the increase of inflation and

the oil shock. Corporate were struggled to manage the uncertainty in term of profits, cash

flows and future costs. Later, the financial derivatives such as the foreign currency, interest

rate, and commodity derivatives emerged to manage risks faced by the corporations.

Multinational Corporation (MNC) utilize various types of financial derivatives as hedge

instruments such as currency options, futures, forwards, swaps etc. to calculate or secure

against uncertainties in the market which could destroy the firm value. The vast majority of

MNCs utilize these types of hedge instruments.

As such, the hedging programs are becoming increasingly popular among global companies.

According to (Morgan, 2012), 46 percent of the customers from large corporations in Japan,

Europe and the U.S. has hedged their 2012 FX exposure and 13 percent of them hedged their

2013 FX exposure. Some believed that the negative impact of exchange rate fluctuations on

the foreign currency expenditures or revenues could not be offset due to the lacking of

hedging. This is because hedging protects against unfavourable currency movements. Next,

the uncertainties about the exchange rates could not be eliminated and this will make the

company difficult to institute budget planning. In addition, companies are unable to focus on

its core activities due to monitoring of currency movements which takes a plenty of time.

Furthermore, the complexity of foresting rate movements could not be overcome without

hedging.

However, there are also cases where the companies still maintain its competitiveness without

hedging. For example, Nissan Motor Co has a longstanding no-hedge policy by diversifying

the global operations and creates a natural hedge by matching revenue to expenses in local

currencies. In addition, Autoliv Inc., a Stockholm-based seatbelt and airbag maker stated that

it would continue to rely on natural hedges, such as its factories in China(Mattioli and

Schoenberger 2011).

These companies are able to maintain its competitiveness even without managing the foreign

exchange rates by undertaking natural hedging. This arises when a business invests in two

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different assets or business units where the cash flows from each cancel out some particular

risk (Jeffery, n.d.). The idea behind this technique is that poor performance by the original

investment can be offset by good performance by the second one, and vice versa. It is also a

less-complicated manner of hedging than using intricate investment techniques like

derivatives. As mentioned earlier, Nisan Motor Co practices natural hedging. It sold its final

products to other foreign countries i.e. China and it could arrange for some imports from

China rather than receiving the payment in its home currency in a few months. This matches

the payment with the expected dollar receipts which is due in a few months. As such, it could

eliminate the need for any hedging against foreign exchange movements.

Next, it is also possible that MNC do not undertake hedging or practice to manage the foreign

exchange risk because the risk protection advantages of hedging can also be viewed as its

main weakness. According to (Financial Web, n.d.), hedging does not provide ample

flexibility that allows investors to quickly react to market dynamics as it is intended to protect

investors against losses and risk. When it comes to investments, risks and rewards are directly

proportional to each other. If the investors minimize the risks, the potential profits will be

reduced as well. It is because the higher is the risk, the higher the returns will be.

Furthermore, hedging involves costs that eat up the profit. In order to be successful with this

investment approach, the investors need to have enough money to fund his or her investments

and also be willing to wait for a long time before the investors can enjoy the profits. Some

corporations chose to diversify either its finances or operations to deal with the economic

exposures efficiently. This can be done by diversifying its operations by either moving to

locations where the cost of production is low, having a flexible supplier policy, or changing

the target market for its products and the types of products it deals in. This can be seen in the

case of Toyota. When a strong Yen made Japanese exports to US more expensive, Toyota has

decided to moveits production from Japan to US where it achieved comparatively lower costs

of production and this enable it to compete in the US car market. (Eun & Resnick, 2007)

In addition, hedging is not practical for the short term trader due to the increased noise in the

market when using shorter timeframes. If the market is trending then it has little function. In

order to deal with the risks that involves short term transactions, it can be done using

financial instruments. However, it requires changes in the operations of the company for long

term. As such, MNC can have an equal amount of exposed foreign currency assets and

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liabilities. This will help to offset the gain or loss due to changes in the exchange rates of that

currency.

In conclusion, hedging or managing foreign exchange rate risk has both the advantages and

disadvantages. However, it is not necessary for the multinational corporation to undertake

hedging or manage the foreign exchange rate as it requires additional cost to service it.

(919 words)

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References

Edge, K. (n.d.). HSC Online - Determination of exchange rates. Retrieved May 5, 2014, from

http://www.hsc.csu.edu.au/economics/place/exchange_rates/Tutorial5Determinationof

Ex.html

Financial Web. (n.d.). Currency Hedging: Benefits and Disadvantages - Financial Web.

Retrieved May 6, 2014, from http://www.finweb.com/investing/currency-hedging-

benefits-and-disadvantages.html#axzz30v5hqUOQ

Jeffery, G. (n.d.). Natural Hedge - GrahamJeffery.com. Retrieved May 6, 2014, from

http://grahamjeffery.com/glossary/318-natural-hedge

Mark, S. (2013). Impact of RMB Appreciation | Marksix lottery. Retrieved May 5, 2014,

from http://marksixlottery.wordpress.com/2013/03/07/impact-of-rmb-appreciation-3/

Mattioli.D And Schoenberger.C.R. (2011). At Some Companies, Currency Hedging is Losing

Favor - WSJ.com. Retrieved May 6, 2014, from

http://online.wsj.com/news/articles/SB10001424052748703803904576152442756363

116

Morgan, J. P. (2012). Best Practices: Foreign Exchange RIsk Management. JPMorgan Chase

& Co., 1, 13.

Pettinger, T. (2008). Inflation: Advantages and Disadvantages | Economics Help. Retrieved

May 3, 2014, from http://www.economicshelp.org/blog/315/inflation/inflation-

advantages-and-disadvantages/

Pettinger, T. (2014). The effects of an appreciation | Economics Help. Retrieved May 4, 2014,

from http://www.economicshelp.org/blog/10050/economics/effects-appreciation/

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Vincent, L. (2010). RMB Appreciation May Benefit China More Than US｜Economy｜In-

depth｜WantChinaTimes.com. Retrieved May 5, 2014, from

http://www.wantchinatimes.com/news-subclass-

cnt.aspx?id=20101117000035&cid=1502

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Appendix 1

Calculation for inflation rate

Inflation Rate

Date CHINA EU US JapanJan, 2005 0.0190 -0.0128 0.0070 0.0050

Mar, 2005 0.0270 -0.0068 0.0330 0.0050

Jun, 2005 0.0160 -0.0016 0.0450 0.0030

Sep, 2005 0.0090 0.0084 0.0880 0.0060

Dec, 2005 0.0160 0.0090 0.0680 0.0030

Mar, 2006 0.0080 0.0147 0.0980 0.0030

Jun, 2006 0.0150 0.0229 0.1290 0.0080

Sep, 2006 0.0150 0.0261 0.1290 0.0120

Dec, 2006 0.0280 0.0279 0.1180 0.0060

Mar, 2007 0.0330 0.0341 0.1535 0.0020

Jun, 2007 0.0440 0.0424 0.1835 0.0060

Sep, 2007 0.0620 0.0479 0.1849 0.0100

Dec, 2007 0.0650 0.0593 0.2004 0.0130

Mar, 2008 0.0830 0.0708 0.2353 0.0140

Jun, 2008 0.0710 0.0838 0.2882 0.0260

Sep, 2008 0.0460 0.0859 0.2878 0.0310

Dec, 2008 0.0120 0.0758 0.2023 0.0170

Mar, 2009

-

0.0120 0.0765 0.2271 0.0110

Jun, 2009

-

0.0170 0.0821 0.2569 0.0080

Sep, 2009

-

0.0080 0.0818 0.2597 0.0080

Dec, 2009 0.0190 0.0856 0.2595 0.0000

Mar, 2010 0.0240 0.0930 0.2763 0.0030

Jun, 2010 0.0290 0.0980 0.2796 0.0010

Sep, 2010 0.0360 0.1013 0.2844 -0.0010

Dec, 2010 0.0460 0.1094 0.2918 -0.0040

Mar, 2011 0.0540 0.1215 0.3347 -0.0020

Jun, 2011 0.0640 0.1272 0.3572 -0.0030

Sep, 2011 0.0610 0.1335 0.3689 -0.0010

Dec, 2011 0.0410 0.1398 0.3567 -0.0060

Mar, 2012 0.0360 0.1510 0.3939 0.0030

Jun, 2012 0.0220 0.1534 0.3948 -0.0040

Sep, 2012 0.0190 0.1627 0.4141 -0.0040

Dec, 2012 0.0250 0.1649 0.3960 -0.0070

Mar, 2013 0.0210 0.1707 0.4277 -0.0060

Jun, 2013 0.0270 0.1716 0.4350 -0.0020

Sep, 2013 0.0310 0.1755 0.4415 0.0060Dec, 2013 0.0250 0.1746 0.4305 0.0090

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Appendix 2

Calculation for real exchange rate

Real Exchange Rate = Nominal Exchange Rate*(1+inflation rate in foreign country)/(1+inflation rate in home

country)Date RMB/EU RMB/USD RMB/JPY

Jan, 2005 11.2275 8.3756 0.0813

Mar, 2005 11.2296 8.2284 0.0810

Jun, 2005 10.6162 8.0468 0.0780

Sep, 2005 9.9398 7.5500 0.0734

Dec, 2005 9.6810 7.6893 0.0699

Mar, 2006 9.6168 7.3914 0.0692

Jun, 2006 9.9885 7.2037 0.0705

Sep, 2006 10.0476 7.1626 0.0688

Dec, 2006 10.1395 7.2308 0.0683

Mar, 2007 10.1582 6.9506 0.0670

Jun, 2007 10.3684 6.7740 0.0660

Sep, 2007 10.5252 6.7751 0.0675

Dec, 2007 10.8228 6.5949 0.0691

Mar, 2008 10.8505 6.2821 0.0726

Jun, 2008 10.7503 5.7862 0.0696

Sep, 2008 9.9286 5.5573 0.0644

Dec, 2008 8.4851 5.7579 0.0708

Mar, 2009 8.2049 5.5040 0.0715

Jun, 2009 8.4497 5.3415 0.0684

Sep, 2009 8.9511 5.3794 0.0718

Dec, 2009 9.4643 5.5236 0.0774

Mar, 2010 8.8619 5.4780 0.0769

Jun, 2010 8.1598 5.4878 0.0762

Sep, 2010 8.2158 5.4613 0.0817

Dec, 2010 8.5381 5.3909 0.0848

Mar, 2011 8.4529 5.1965 0.0845

Jun, 2011 8.8274 5.0957 0.0851

Sep, 2011 8.4987 4.9707 0.0876Dec, 2011 7.8432 4.8841 0.0862

Mar, 2012 7.4432 4.6889 0.0823

Jun, 2012 7.1947 4.6304 0.0810

Sep, 2012 6.9371 4.5583 0.0823

Dec, 2012 7.1812 4.6203 0.0801

Mar, 2013 7.2353 4.4921 0.0701

Jun, 2013 7.1037 4.4419 0.0647

Sep, 2013 7.1624 4.4097 0.0638

Dec, 2013 7.2756 4.3896 0.0621

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Appendix 3

Calculation for under or over valuation

Under / overvaluation = [(Real Exchange Rate - Spot Exchange Rate)/ Spot Exchange Rate] x100

Date RMB/EU RMB/USD RMB/JPY

Jan, 2005 3.2181 1.1917 1.3930

Mar, 2005 3.3990 -0.5808 2.1891

Jun, 2005 1.7659 -2.7751 1.2961

Sep, 2005 0.0595 -7.2610 0.2982

Dec, 2005 0.6938 -4.8689 1.2961

Mar, 2006 -0.6603 -8.1967 0.4985

Jun, 2006 -0.7723 -10.0974 0.6944

Sep, 2006 -1.0818 -10.0974 0.2964

Dec, 2006 0.0097 -8.0501 2.1869Mar, 2007 -0.1064 -10.4465 3.0938

Jun, 2007 0.1535 -11.7871 3.7773

Sep, 2007 1.3455 -10.3722 5.1485

Dec, 2007 0.5381 -11.2796 5.1333

Mar, 2008 1.1393 -12.3290 6.8047

Jun, 2008 -1.1810 -16.8607 4.3860

Sep, 2008 -3.6744 -18.7762 1.4549

Dec, 2008 -5.9305 -15.8280 -0.4916

Mar, 2009 -8.2211 -19.4850 -2.2750

Jun, 2009 -9.1581 -21.7917 -2.4802

Sep, 2009 -8.3010 -21.2511 -1.5873

Dec, 2009 -6.1349 -19.0949 1.9000

Mar, 2010 -6.3129 -19.7681 2.0937

Jun, 2010 -6.2842 -19.5842 2.7972

Sep, 2010 -5.9294 -19.3398 3.7037

Dec, 2010 -5.7148 -19.0277 5.0201

Mar, 2011 -6.0187 -21.0309 5.6112

Jun, 2011 -5.6068 -21.6033 6.7202

Sep, 2011 -6.3961 -22.4925 6.2062Dec, 2011 -8.6682 -23.2697 4.7284

Mar, 2012 -9.9913 -25.6762 3.2901

Jun, 2012 -11.3924 -26.7278 2.6104

Sep, 2012 -12.3592 -27.9400 2.3092

Dec, 2012 -12.0096 -26.5759 3.2226

Mar, 2013 -12.7872 -28.4864 2.7163

Jun, 2013 -12.3421 -28.4321 2.9058

Sep, 2013 -12.2926 -28.4773 2.4851

Dec, 2013 -12.7363 -28.3467 1.5857

8/11/2019 Bfw 3331 Question 1


8/11/2019 Bfw 3331 Question 1


Appendix 4

Calculation for overall average of under or over valuation

Average under/overvaluation

Date RMB/EUR RMB/USD RMB/JPY

2005 1.8272 -2.8588 1.2945

2006 -0.6262 -9.1104 0.9191

2007 0.4827 -10.9713 4.2882

2008 -2.4116 -15.9485 3.0385

2009 -7.9538 -20.4057 -1.1106

2010 -6.0603 -19.4300 3.4037

2011 -6.6725 -22.0991 5.8165

2012 -11.4381 -26.7300 2.8581

2013 -12.5396 -28.4356 2.4232

Sum -45.3921

-

155.9894 22.9312

Overall Average -5.0436 -17.3322 2.5479

Appendix 5

Average Under/Overvaluation of RMB/USD

H1-2005 -0.7214

H2-2005 0.7972

Appendix 6

Average Under/Overvaluation of RMB/EUR

H1-2005 2.7943

H2-2005 0.3766

Appendix 7

Average Under/Overvaluation of RMB/JPY

H1-2005 1.6261

H2-2005 0.7972

8/11/2019 Bfw 3331 Question 1


Appendix 8

Data used to constructs the graphs in Question 1 part 1

Average Inflation on Yearly Basis

Year EU US JPY

2005 -0.0008 0.0482 0.0044

2006 0.0229 0.1185 0.0072

2007 0.0459 0.1324 0.0070

2008 0.0791 0.1460 0.0065

2009 0.0381 0.1600 0.0060

2010 0.0750 0.1806 0.0077

2011 0.0791 0.2010 0.0108

2012 0.0655 0.2272 0.0158

2013 0.0801 0.2529 0.0210

Average Nominal and Real Exchange Rate of RMB/USD

Year Nominal Exchange Rate Real Exchange Rate

2005 8.2108 7.9780

2006 7.9738 7.2471

2007 7.9013 7.1369

2008 7.8179 7.0295

2009 7.7159 6.9326

2010 7.6083 6.7736

2011 7.4593 6.6065

2012 7.2794 6.3596

2013 7.1001 6.0551

Average Nominal and Real Exchange Rate of RMB/EUR


2005 10.3436 10.53882006 10.0107 9.9481

2007 10.1328 10.0834

2008 10.2044 10.1784

2009 10.2614 10.2978

2010 10.4180 10.4687

2011 10.5578 10.6417

2012 10.6894 10.7372

2013 10.6698 10.5881

8/11/2019 Bfw 3331 Question 1


Average Nominal and Real Exchange Rates of RMB/JPY


2005 0.0757 0.0767

2006 0.0686 0.0692

2007 0.0676 0.0686

2008 0.0660 0.0675

2009 0.0649 0.0672

2010 0.0646 0.0674

2011 0.0654 0.0688

2012 0.0662 0.0697

2013 0.0660 0.0689

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Bfw 3331 Question 1