7. The states that the foreign exchange market is stable when in absolute sense the sum of the price elasticities of demands for imports and exports is greater than one. A) J-curve effect B) Marshall-Lerner condition C) pass-through condition stable market theory D)
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- Suppose the annual interest rate in Australia is 1.5% and the interest rate in the United States is 2%. Suppose the spot USD/AUD exchange rate is $73/AUD and the exchange rate on a futures contract for delivery in one year's time is $75/AUD. (a) Suppose the Australian Reserve Bank increases the cash rate, causing Australian interest rates to rise. All else equal, would the USD/AUD exchange rate increase, decrease, or stay the same? (b) An investor wants to save $6,000 USD for a year and is looking for the option with the highest guaranteed return in USD. Would an investor prefer to save $6,000 USD for a year in the United States or in Australia? To support your answer, calculate the profits under each scenario.(a) Suppose a computer sells for US$1,200 in the U.S. and for £855 in London. If the exchange rate is £0.65 per dollar, is there any arbitrage (profit opportunity)? Explain (b). (not connected to part a). If the Euro price of one Canadian dollar was 0.770 in 2003 and the exchange rate adjusted to 1.176 Canadian dollar per Euro in 2004, did the Euro appreciate or depreciate against the Canadian dollar. Explain and show your computation.On June 1, 2016, the exchange rate for U.S. dollars and euros was approximately $1.00 = €0.90, as shown in the market for U.S. dollars below. Suppose the interest rate is expected to fall in the European Union (relative to the interest rate in the U.S.). How will this affect the value of the dollar relative to the euro? Exchange Rate (€/S) 0.9 Quantity of Dollars Traded. D₁ S₁
- 10) Assume the overall US market price for retail chocolate is $7.00 per pound, and in order to attract "Chocoholic Tourists" from Europe, the Hershey company decides to lower its price to $6.00 per pound. Based on the Purchasing Power Parity theory of exchange rates, what will eventually happen the effective price of chocolate for European buyers, assuming the Euro-USD exchange rate starts at 1€ Per $1.00? Using the chart below, determine the exchange rate at which Hershey's effective chocolate prices will match those of the rest of the chocolate market? # of Lbs Chocolate Exchange Exchange Chocolate 200 Effective budget in Rate Euros Rate budget in Price Euro Euro/$ $/Euro $'s Euros will buy 200.00 € 1.00 1.00 $200 33.33 6.00 € 200.00 € 1.05 0.95 $190 31.75 6.30 € 200.00 € 1.10 0.91 $182 30.30 6.60 € 200.00 € 1.15 0.87 $174 28.99 6.90 € 200.00 € 1.20 0.83 $167 27.78 7.20 € 200.00 € 1.25 0.80 $160 26.67 7.50 € 200.00 € 1.30 0.77 $154 25.64 7.80 € 200.00 € 1.35 0.74 $148 24.69 8.10 €Assume you are a trader with Deutsche Bank. From the quote screen on your computer terminal, you notice that Dresdner Bank is quoting EUR/USD at 1.2459 and Credit Suisse is offering USD/CHF at 0.8850. You learn that UBS is making a direct market between the Swiss franc and the euro, with a current EUR/CHF of 1.1048. (Ignore bid-ask spreads for this problem.) Assume you have $5,000,000 with which to conduct the arbitrage. What is the EUR/CHF rate that eliminate triangular arbitrage? (X.XXXX)(a) An analyst argues that exchange rate movements depend on interest rate differentials (that is, the International Fisher effect), country-specific economic policy uncertainty measures and country-specific GDP growth rates. With this in mind, the analyst estimates the following model:Expected rate of appreciation of yen against the dollar(%)= =0.5[idollar(%) – iyen(%)]+0.5[idollar(%) – iyen(%)]2+0.2[σUS(%) – σJAP(%)]++0.2[σUS(%) – σJAP(%)]2+0.1[GDPJAP(%) – GDPUS(%)].In this model, idollar(%) is the one-year interest rate in the US, iyen(%) is the one-year interest rate in Japan, σUS(%) refers to economic policy uncertainty in the US, σJAP(%) refers to economic policy uncertainty in Japan, GDPUS(%) refers toannual GDP growth in the US and GDPJAP(%) refers to annual GDP growth in Japan. Assume idollar=6%, iyen=4%, σUS=5%, σJAP=1%, GDPUS=2% and GDPJAP=1%. Calculate the expected rate of appreciation of the yen against the dollar. Explain your findings in no more than 200 words .(b) An…
- (a) An analyst argues that exchange rate movements depend on interest rate differentials (that is, the International Fisher effect), country-specific economic policy uncertainty measures and country-specific GDP growth rates. With this in mind, the analyst estimates the following model: Expected rate of appreciation of yen against the dollar(%)= =0.5[idollar(%) – iyen(%)]+0.5[idollar(%) – iyen(%)]2+0.2[σUS(%) – σJAP(%)]+ +0.2[σUS(%) – σJAP(%)]2+0.1[GDPJAP(%) – GDPUS(%)]. In this model, idollar(%) is the one-year interest rate in the US, iyen(%) is the one-year interest rate in Japan, σUS(%) refers to economic policy uncertainty in the US, σJAP(%) refers to economic policy uncertainty in Japan, GDPUS(%) refers to annual GDP growth in the US and GDPJAP(%) refers to annual GDP growth in Japan. Assume idollar=6%, iyen=4%, σUS=5%,σJAP=1%, GDPUS=2% and GDPJAP=1%. Calculate the expected rate of appreciation of the yen against the dollar. Explain your findings in no more than 200 words.…If the U.S. dollar appreciates relative to the Euro then, (all else constant) A) U.S. exports will increase B) U.S. imports will increase C) No change in U.S. imports or exports will occur D) All are possibleIf one U.S. dollar is traded on the foreign exchange market for about 0.89 euros, then one euro can purchase about U.S. dollars. a) 0.75 b) 1.12 c) 1.75 d) 0.89
- Suppose the foreign exchange market is characterized by the following equations: Qd = 12.5 – 1.25R Qs = 3.5 + 1.25R where Qd is the demand function for foreign exchange, Qs is supply function of foreign exchange, and R is exchange rate in units of domestic currency per unit of foreign currency (quantity is in million units of foreign currency). ===================== The foreign exchange market described above is Select one: stable unstable unpredictable none of the aboveIn answering the question, you should emphasize the line of reasoning that generated your results; it is not enough to list the results of your analysis. Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes. Assume that yesterday the exchange rate between the euro and the Singaporean dollar was 1 euro = 0.58 Singaporean dollars. Assume that today the euro is trading at 1 euro = 0.60 Singaporean dollars. %3D a. How will the change in the exchange rate affect each of the following in Singapore in the short run? i. Aggregate demand. Explain. ii. The level of employment. Explain. b. Suppose that Singapore wants to return the exchange rate to 1 euro = 0.58 Singaporean dollars. i. Should the Singaporean central bank buy or sell euros in the foreign exchange market? ii. Instead of buying or selling euros, what domestic open-market operation can the…25 The exchange rate between the euro (€) and the US dollar ($) is $1,20 per euro. If an American tourist in Paris purchases a good valued at 60 euros, then in his own currency this would cost: a) $50 4 b) $72 c) $48 d) $720