Assignment:
QUESTION 1
Percentage Depreciation Assume the spot rate of the British pound is $1.73. The expected spot rate 1 year from now is assumed to be $1.66. What percentage depreciation does this reflect?
QUESTION 2
Inflation Effects on Exchange Rates Assume that the U.S. inflation rate becomes high relative to Canadian inflation. Other things being equal, how should this affect the (a) U.S. demand for Canadian dollars, (b) supply of Canadian dollars for sale, and (c) equilibrium value of the Canadian dollar?
QUESTION 3
Effects of Real Interest Rates What is the expected relationship between the relative real interest rates of two countries and the exchange rate of their currencies?
QUESTION 4
Forward versus Futures Contracts Compare and contrast forward and futures contracts.
QUESTION 5
Currency Options Differentiate between a currency call option and a currency put option.
QUESTION 6
Exchange Rate Systems Compare and contrast the fixed, freely floating, and managed float exchange rate systems. What are some advantages and disadvantages of a freely floating exchange rate system versus a fixed exchange rate system?
QUESTION 7
Direct Intervention How can a central bank use direct intervention to change the value of a currency? Explain why a central bank may desire to smooth exchange rate movements of its currency.
QUESTION 8
Intervention Effects Assume there is concern that the United States may experience a recession. How should the Federal Reserve influence the dollar to prevent a recession? How might U.S. exporters react to this policy (favorably or unfavorably)? What about U.S. importing firms?
CASE STUDY
Small Business Dilemma, page 130, text.
Read the case and write an executive summary on the case, including answers to the following questions.
Assessment by the Sports Exports Company of Factors that Affect the British Pound's Value
Because the Sports Exports Company (a U.S. firm) receives payments in British pounds every month and converts those pounds into dollars, it needs to closely monitor the value of the British pound in the future. Jim Logan, owner of the Sports Exports company, expects that inflation will rise substantially in the United Kingdom, while inflation in the United States will remain low. He also expects that the interest rates in both countries will rise by about the same amount.
1. Given Jim's expectation, forecast whether the pound will appreciate or depreciate against the dollar over time.
2. Given Jim's expectation, will the Sports Exports Company be favorably or unfavorably affected by the future changes in the value of the pound?