Microsoft Word - Assignment.doc
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1. Briefly answer the following three questions:
a. What are the two properties of an exchange rate crisis?
. What are two of the leading explanations for exchange rate crises?
c. Why should we be concerned with exchange rate crises?
2. Use an on-line source for exchange rates to find the spot rates for the following three
cu
encies: U.S. dollar per British pound (E$,₤), U.S. dollar per Japanese yen (E$,¥), and
Japanese yen per British pound sterling (E¥,₤).
a. Report these three spot exchange rates.
. If there is no a
itrage opportunity, the spot exchange rates for these three
cu
encies should satisfy the following equili
ium condition: E$,₤ = E$,¥×E¥,₤. Do
the spot exchange rates that you retrieved from the on-line source satisfy this
condition? Explain your answer.
3. You are a financial advisor to a U.S. corporation that expects to receive a payment of 40
million Japanese yen in 180 days for goods exported to Japan. The cu
ent spot exchange
ate is XXXXXXXXXXyen per U.S. dollar (E¥,$). You are concerned that the U.S. dollar is going to
appreciate against the yen over the next six months.
a. Assuming the exchange rate remains unchanged, how much does your firm expect
to receive in U.S. dollars in 180 days?
. How much would your firm receive (in U.S. dollars) if the dollar appreciates to
112 yen per U.S. dollar (E¥,$ = 112)?
c. Describe how you could use a forward exchange rate contract to hedge against the
isk of losses associated with the potential appreciation of the U.S. dollar.
4. Suppose Switzerland has a real output growth rate of 3% and growth rate of nominal
money supply of 8% per year. Use the monetary model of the long-run real exchange
ates to answer the following questions.
a. What is Switzerland’s rate of inflation rate in this case?
. Describe how the Swiss Central Bank could use monetary policy to achieve a
long-run inflation rate equal to 2% in the long-run.
5. You are given the following information. The cu
ent spot exchange rate is U.S. $1.33
per pound sterling. A basket of goods that costs $100 in the U.S. costs $120 in the United
Kingdom (U.K.). For the following year, the Federal Reserve Bank of the United States is
expected to keep the U.S. inflation rate at 2% and the Bank of England is predicted to
keep the U.K. inflation rate at 3%.
a. What is the expected inflation differential between the U.S. and U.K. for the
coming year?
. What is the real exchange rate qUS,UK between the U.S. and the U.K.?
c. How much is the U.S. dollar overvalued/undervalued with respect to the pound
sterling?
d. Assuming the speed of convergence to absolute purchasing power parity is 15%
per year, what do you predict the real exchange rate between the U.S. and the
U.K. will equal in one year’s time?
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e. What is the expected rate of nominal depreciation between the U.S. dollar and the
pound sterling (ΔE$,₤,t/E$,₤,t)?