Economics: Principles & Policy
14th Edition
ISBN: 9781337696326
Author: William J. Baumol; Alan S. Blinder; John L. Solow
Publisher: Cengage Learning
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Question
Chapter 35, Problem 7DQ
To determine
The effect of change in exchange rate on the value of money.
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Suppose that you hold a piece of land in the city of London that you may want to sell in one year. As a U.S. resident, you are concerned with the dollar value of the land. Assume that if the British economy booms in the future, the land will be worth £2,000, and one British pound will be worth $3.20. If the British economy slows down, on the other hand, the land will be worth less, say, £1,500, but the pound will be stronger, say, $3.30 per pound. You feel that the British economy will experience a boom with a 60 percent probability and a slowdown with a 40 percent probability.
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Estimate your exposure (b) to the exchange risk.
Note: Negative amount should be indicated by a minus sign.
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AstraZeneca's U.K. bank would always profit
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less than 3%
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greater than 3%
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In Belarus, the government doesn’t allow trading of its ruble outside a narrow price range, which greatly overvalues the ruble – there is a price floor on the ruble compared to euros or dollars. Because of the floor, currency trading has dried up – who would want to sell foreign currencies for grossly overpriced Belarusian rubles? A friend of one of my students has a web site designed to overcome rigidities in this market, a sort of Craigslist for currency. People specify amounts they are willing to buy or sell, agree to trade at some price and arrange a meeting place. When they meet, the trade nominally occurs at the official price floor, making the transaction nominally legal; but the person selling rubles makes extra payments to the buyer to lower the price sufficiently so that the trade actually takes place at the equilibrium price. This is one more way in which technology helps markets circumvent imperfections and rigidities.
Q: If the Belarusian government increases…
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