Eco 4713 quiz 1 1) You have obtained the following spot rates: Spot rate per U.S. $ Japanese yen 80 Mexican peso 11.75 June 2015 June 2016 120 9.25 From the above information, the U.S. dollar has against the Japanese yen and it has against the Mexican peso. Ans) appreciated, depreciated 2) Suppose that Citibank buys a large amount of Japanese yen from Toyota and Citibank does not want to continue holding too much yen. Assume that the current buy rate is 101.4 and the current sell rate is 101.8 (yen per dollar). How should Citibank adjust its buy rate and sell rate of the yen (yen per dollar) to "square off" ? Ans) Citibank has to raise both buy and sell rates. 3) A currency trader at the Boston airport has a buy rate of 1.3062 and a sell rate of 1.7484 for dollars per pound. Assume that a U.S. tourist returns from the U.K. and wants to sell 1,000 pounds. Five minutes later a U.S. tourist that is on his way to the U.K. comes to the same trader and wants to buy 1,000 pounds. Compute the profit/loss in dollars, for the currency trader from the two transactions. Ans) 442.20 4) Suppose that the spot exchange rates for British pound (dollar per pound) quoted in two locations are:
Barclays, London Citi, New York Buy 1 pound $1.55 $1.60 Sell 1 pound $1.58 $1.63 Suppose that you have 1 million pounds, you can make an arbitrage profit by selling pounds for dollars in and selling dollars for pounds in ? Ans) New York, London 5) Assume that French people have an increased taste for U.S. exports. Would the euro appreciate or depreciate according to the trade flow model? Ans) Euro would depreciate 6) Arrange the following currency exchange systems from the one with the least independent monetary policy to the most independent monetary policy. i. Target bands ii. Currency board iii. Fixed peg iv. Free floating Ans) Currency board, fixed peg, target bands, free floating 7) Assume that the following exchange rates exist. New York 2.00 London 2.00 Geneva - $/ Pound $/ SFr .60 - .60 SFr/ Pound - 3.00 3.00
Suppose that you are an arbitrageur that starts with $100 in New York. How much arbitrage profit can you make? Ans) $11.11 8) Figure 2.3: The Market for British Pounds SSIE S1(£) 2.20 D 2.00 B A C 1.90 E D2(£) D1(£) D3(£) Q5 Q4 Q1 Q2 Q3 Quantities of pound Refer to Figure 2.3. Suppose that the spot exchange rate of British pound is $2.00 per pound. Suppose that the U.S. decreases its taste for imports from the U.K. Under a flexible exchange rate system, the Bank of England will: Ans) Let the British pound depreciate 9)