1) Explain how each of the following scenarios, holding other things equal, will affect the value of the cherrio. Scenarios: a. U.S. inflation has suddenly increased substantially, while inflation in Cherryland remains low. b. Real interest rates have increased substantially in the U.S.; while real interest rates in Cherryland remain low. c. The U.S. income level increased substantially, while in Cherryland income level has remained unchanged.

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter9: Forecasting Exchange Rates

Section: Chapter Questions

Problem 28QA

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Concept explainers

Instruments of Foreign Exchange Market

Foreign exchange is a worldwide market in which one nation’s currency is converted into another nation’s currency. In further terms, exchanging of nations currency with foreign currencies. Foreign exchange happens at a specified rate which is termed the foreign exchange rate. The exchange rates are not constant continuously changing as they are derived by market forces of supply and demand. Widely used foreign currencies are the United States- dollar, Euro, Japanese Yen, British pound, and Australian dollar. US- dollar is the most denominated foreign currency. The Euro to US dollar is a widely used currency pair in the forex market as these two currencies represent the world’s enormous economy. Forex trade is simple as exchanging currencies at the bank. The main players of forex markets are the central banks, financial institutions, intermediaries, investments banks, and other banks. Central Bank is the supreme player who decides the currency value of their own nation on the forex market. Mostly foreign exchange-traded at FX market (forex market) when tourists’ visits a foreign country, import, and export happens between two countries.

Question

1) Explain how each of the following scenarios, holding other things equal, will affect the value of the
cherrio.
Scenarios:
a. U.S. inflation has suddenly increased substantially, while inflation in Cherryland remains low.
b. Real interest rates have increased substantially in the U.S.; while real interest rates in Cherryland
remain low.
c. The U.S. income level increased substantially, while in Cherryland income level has remained
unchanged.
d. The U.S. is expected to impose a small tariff on goods imported from Cherryland.
2) Aggregate all of these impacts to develop an overall forecast of the cherrio’s movement against the
U.S. dollar

Leveraging special tenchniques in analyzing historical data to predict future trends. Forecasting covers the methods and types of forecasting and their application to case studies.

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