Problem Set 1(Due Thursday, Feb. XXXXXXXXXXpoints XXXXXXXXXXpoints) Explain how each of the following transactions generates two entries—a credit and a debit—in the American balance of payments...

Problem Set 1(Due Thursday, Feb.

25)(100 points)1. (20 points) Explain how each of the following

transactions generates two entries—a credit and a debit—in the American balance

of payments accounts, and describe in what category of the balance of payments

(i.e. which account) each entry would be classified.a. An American buys a share of German stock,

paying by writing a check on an account with a Swiss bank.b. An American buys a share of German stock,

paying the seller with a check on an American bank.c. The Korean government carries out an official

foreign exchange intervention in which it uses dollars held in an American bank

to buy Korean currency from its citizens.d. A tourist from Detroit buys a meal at a

restaurant in Lyon, France.e. A U.S.-owned factory in Britain uses local

earnings to buy additional machinery.2. (10 points) Explain the difference between the two

kinds of flows of capital abroad.3. (20 points) Explain why NFI = NX.4. (20 points) Describe and explain the long-run

implications of the Feldstein-Horioka Hypothesis for the current account.5. (30 points) EuroDisney, near Paris, conducts its

operations in euros. However, assume

that next year Disney plans to undertake a major expansion of Disney World in

Orlando, and will need to utilize money from EuroDisney to help fund the

project. Of course, the American project

must be paid for in dollars. a. Explain

what forex risk Disney faces in utilizing the European funds.

b. Explain

how, using derivatives, Disney could hedge the forex risk they face.