Chapter 4 - Exchange Rate Determination.doc

May 9, 2018 | Author: hy_saingheng_7602609 | Category: Exchange Rate, Interest, Interest Rates, Foreign Exchange Market, Japanese Yen
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 Answers to End of Chapter 4 Questions spot rate of the British British pound is $1.73. $1.73. The expected 1. Perc Percen enta tage ge Depr Deprec ecia iati tion on.. Assume the spot spot rate one year year from now is assumed to be $1.66. What percentage depreciation depreciation does this refect! A"#W%& '$1.66 ( $1.73)*$1.73 + (,.-/ xpected depreciation of ,.-/ percent 2. Infl Inflat atio ion n Effe Effects cts on Excha Exchang ngee Rate Rates. s.  Assume that the 0.#. infation rate becomes high reatie to 2anadian infation. infation. ther things being e4ua5 how shoud this affect affect the 'a) 0.#. demand for 2anadian doars5 'b) suppy of 2anadian doars for sae5 and 'c) e4uiibrium aue of the 2anadian doar!

A"#W%& A"#W%& emand emand for 2anadian 2anadian doars doars shoud increase5 increase5 suppy of 2anadian 2anadian doars for  sae shoud decrease5 and the 2anadian doars aue shoud increase. 3. Inter Interest est Rate Rate Effe Effects cts on on Exchan Exchange ge Rates Rates.. Assume 0.#. interest rates fa reatie to British interest interest rates. rates. ther ther things being e4ua5 e4ua5 how shou shoud d this affect the 'a) 0.#. demand demand for  British pounds5 'b) suppy of pounds for sae5 and 'c) e4uiibrium aue of the pound!

A"#W%& emand for pounds shoud shoud increase5 suppy suppy of pounds for sae sae shoud decrease5 and the pounds aue shoud increase. 4. Inco Income me Eff Effec ects ts on on Exch Exchan ange ge Rat Rates es.. Assume that the 0.#. income ee rises at a much higher rate than does the 2anadian 2anadian income ee. ther things being being e4ua5 how shoud this this affect the 'a) 0.#. demand for 2anadian doars5 'b) suppy of 2anadian doars for sae5 and 'c) e4uiibrium aue of the 2anadian doar!

A"#W%& Assuming Assuming no effect on 0.#. interest rates5 demand demand for doars shoud increase5 increase5 suppy of doars for sae may not be affected5 and the doars aue shoud increase. Assume that the 8apanese 8apanese goernme goernment nt 5. Trade ade Restri Restricti ction on Effec Effects ts on Exchan Exchange ge Rates Rates.. Assume reaxes its contros on imports imports by 8apanese companies. ther things being e4ua5 e4ua5 how shoud this this affect affect the 'a) 0.#. demand demand for 8apane 8apanese se yen5 yen5 'b) suppy suppy of yen yen for sae5 sae5 and 'c) e4uiibrium aue of the yen! A"#W%& emand for yen shoud not not be affected5 suppy of yen yen for sae shoud increase5 and the aue of yen shoud decrease. 6. Effe Effect ctss of Rea Reall Inte Intere rest st Rat Rates es.. What is the expected reationship between the reatie rea interest rates of two countries and the exchange rate of their currencies!

A"#W%& A"#W%& The higher higher the rea interest interest rate of a country reatie reatie to another another country5 country5 the stronger wi be its home currency5 other things e4ua. . !pec !pec"l "lat ati# i#ee Effe Effect ctss on Exchan Exchange ge Rate Rates. s. xpain why a pubic forecast by a respected economist about future interest interest rates coud affect the aue of the doar today. today. Why do some forecasts by we9respected economists hae no impact on todays aue of the doar!

A"#W%& :nterest rate moements moements affect exchange rates. #pecuators can use anticipated interest rate moements to forecast exchange exchange rate moements. They may decide to purchase securities in particuar countries because of their expectations about currency moements5 since their yied wi be affected by changes in a currencys currencys aue. aue. These purchases of secur9 secur9 ities re4uire an exchange of currencies5 which can immediatey affect the e4uiibrium aue of exchange rates. :f a forecast of interest rates by a respected economist was aready anticipated by mar;et  participants or is not different from inestors origina expectations5 an announced forecast does not proide new information. Thus5 there woud be no reaction by inestors inestors to such an announcement5 and exchange rates woud not be affected. $. %actor %actorss &ffe &ffecti cting ng Excha Exchange nge Rate Rates. s. What factors affect the future moements in the aue of  the euro against the doar!

A"#W%& A"#W%& The euros euros aue coud change change because of the baance baance of trade5 trade5 which refects more 0.#. demand for uropean goods than the uropean demand for 0.#. goods. The capita fows between the 0.#. and urope wi aso affect the 0.#. demand for euros and the suppy of euros for sae 'to be exchanged for doars). Assume that there are subs substanti tantia a capita capita fows fows among among '. Inte Intera ract ctio ion n of Exch Exchan ange ge Rate Rates. s. Assume 2anada5 the 0.#.5 and 8apan. :f interest rates in 2anada decine to a ee beow the 0.#. interest rate5 and infationary expectations remain unchanged5 how coud this affect the aue of the 2anadian doar against against the 0.#. doar! or exampe5 exampe5 if the trade deficit deficit was arger arger than than antic anticipa ipated ted55 and is expected to continue5 this impies that the 0.#. demand for foreign currencies may be arger  than initiay initiay anticipated. anticipated. Thus5 the doar woud be expected to wea;en. #ome specuators specuators may ta;e a position in foreign currencies immediatey and coud cause an immediate decine in the doar.

 b. :n some periods5 foreign exchange traders do not respond to a trade deficit announcement5 een when when the announced deficit deficit is ery arge. ffer an expanation expanation for  such a ac; of response. A"#W A"#W%& %& :f the mar;et mar;et correc correcty ty anticip anticipate ated d the trade trade defici deficitt figure figure55 then then any news contained contained in the announcement announcement has aready been accounte accounted d for in the mar;et. The mar;et mar;et shoud ony respond to an announcement about the trade deficit if the announcement contains new information. 11. )omo#ements of Exchange Rates. xpain why the aue of the British pound against the doar wi not aways moe in tandem with the aue of the euro against the doar.

A"#W%& The euros aue changes in response response to the fow of funds between between the 0.#. and the countries using the euro or their currency. The pounds aue changes in response to the fow of funds between the 0.#. and the 0.?. @Answer is based on intuition5 is not directy from the text. 12. %actor %actorss &ffect &ffecting ing Exchange Exchange Rates. Rates. :n the 1-s5 %ussia was attempting to import more goods but had itte to offer other countries countries in terms of potentia exports. :n addition5 %ussias infation rate was high. high. xpain the type type of pressure that these factors paced on the the %ussian currency.

A"#W A"#W%& %& The The arge arge amount amount of %ussian %ussian imports imports and ac; ac; of %ussian %ussian exports exports paced paced downward pressure on the the %ussian currency. currency. The high infation infation rate in %ussia aso paced downward pressure on the %ussian currency. currency. 13. *ation *ational al Incom Incomee Effects. Effects. Anaysts commony attribute the appreciation of a currency to expectations that economic economic conditions wi strengthen. Cet5 this chapter suggests suggests that when other factors are hed constant5 increased nationa income coud increase imports and cause the oca currency currency to wea;en. :n reaity5 reaity5 other factors factors are not constant. constant. What other factor factor is i;ey to be affected by increased economic growth and coud pace upward pressure on the aue of the oca currency!

A"#W%& :nterest rates tend to rise in in response to a stronger economy economy55 and higher interest rates can pace upward pressure on the oca currency 'as ong as there is not offsetting  pressure by higher expected expected infation). 14. %actors &ffecting Exchange Rates. :f the Asian countries experience a decine in economic growth 'and experience a decine in infation and interest rates as a resut)5 how wi their  currency aues 'reatie to the 0.#. doar) be affected!

A"#W%& A reatie decine in Asian economic growth wi reduce Asian demand for 0.#.  products5 which paces upward pressure on Asian currencies.
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