E) In this economy, the exchange rate is related to percapita income, interest rate, inflation rate andunemployment rate asExchange=800+inflation rate-(inflationrate)2+0.001×per capita income+Interestrate+Interest rate2+0.11xUnemployment ratei. Define exchange rate and explain the differencebetween flexible exchange rate and dirty-floatexchange systems (2%)ii. Mention two advantages associated with eachsystem of exchange rate explained above (2%)

Exchange rate- An exchange rate is the value of one's nation currency versus the currency of…

Answered: exchange systems (2%) ii. Mention two…

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter5: Currency Derivatives

Section: Chapter Questions

Problem 28QA

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2. Suppose you observe the following exchange rates: €1 = $1.25; £1 = $2.00. Calculate the £/€ cross rate and €/£ cross rate
IF 1 Suppose that you observe the following exchange rates:$1.75/£; $.0075/¥; and £.005/¥. Is there cross-rate equality? If yes, why? If not, what would you expect to happen?
Let a flexible exchange rate system. Assume a current account deficit of $100 billion. Then the capital account balance must be a . a surplus of something more than $100 million. b . a deficit of $100 billion. c . a surplus of $100 billion. d . None of the answers is correct
A1a Suppose that you observe the following exchange rates:$1.75/£; $.0075/¥; and £.005/¥.Is there cross-rate equality?
(1)Under a flexible exchange rate system, the three endogenous variables in the IS/LM/BP model are output, interest rates and money supply prices, output and unemployment income, output and expenditure output, interest rates and exchange rate
Required: i) Under a fixed exchange rate, a continuous increase in domestic credit will finally cause... i. unemployment to rise ii. unemployment to fall iii. iv. V. exchange rate regime to collapse exchange rate regime to get stronger economic growth
2. Assume the following exchange rates: Currencies MXN/USD MXN/JPY JPY/USD Is triangular arbitrage possible? If so, how much is your profit in USD if you start with $1,000,000? Exchange Rate 0.0470 5.2300 0.0088
Based on the reading and the table above, is the exchange rate of dollars to pounds fixed or flexible? Explain your answer.
Under a flexible exchange rate system, the three endogenous variables in the IS/LM/BP model are O income, output and expenditure O output, interest rates and money supply O output, interest rates and exchange rate O prices, output and unemployment
A6) Finance What is a forward exchange rate? When does deliv- ery occur on a 90-day forward contract?
We observe Fo> Soera-r), where Fo is the direct forward exchange rate, "a is the domestic risk-free rate, ry is the foreign riskfree rate, T is the maturity of the forward contract, So is the direct spot exchange rate. Choose an action from below to arbitrage: O At time 0, we convert the foreign currency we borrowed into domestic currency. O At time 0, borrow 1000 foreign currency atr, for T. O Long forward: buy the foreign currency at T at F, using domestic currency received from the domestic bank. O At time 0, borrow 1000 domestic currency at r for T.
Due to ____, market forces should realign the relationship between the interest rate differential of two currencies and the forward premium (or discount) on the forward exchange rate between the two currencies. A. forward realignment arbitrage B. triangular arbitrage C. covered interest arbitrage D. locational arbitrage

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exchange systems (2%) ii. Mention two advantages associated with each system of exchange rate explained above (2%)