Part 4. Theories of currency value
a. If a country relaxes the restrictions on foreign investment in its financial markets, what is the expected effect on the value of the country's currency according to the flow theory? Explain.
b. A country's money supply is increasing. What does the stock theory of currency value suggest will happen to the value of the country's currency? Explain.
c. A country has a trade surplus. What does the flow theory suggest will happen to the value of the country's currency? What does the asset theory suggest will happen? Explain.
Part 5. Balance of payments
a. What entries in a country's balance of payments indicate that it has a trade surplus? (Be sure to indicate in what section of the balance of payment those entries will appear.)
b. If a country has a trade deficit, what would we expect of the balance of its financial and capital accounts on the country's balance of payments?
Part 7. Arbitrage
a. If the dealers' quotes for the opportunity? If so, what trades profitable is it, and what is this Dealer USD/MXN quote
1 18.2860 - 18.2978
2 18.2962 - 18.3009
3 18.2900 - 18.3003
4 18.2944 - 18.3006
5 18.2942 - 18.2984
6 18.2948 - 18.3008
7 18.2905 - 18.2955
8 18.2953 - 18.3052
9 18.2922 - 18.2966
10 18.2899 - 18.2972
b. If the exchange rates in New York and Sao Paulo are as indicated below, is there an arbitrage opportunity? If so, what trades must be made to take advantage of the opportunity, how
profitable is it, and what is this type of arbitrage called? New York quotes
USD/BRL 3.3011
EUR/USD 1.1420
Sao Paulo quotes EUR/BRL 3.7689
c. If the USD/JPY spot and 9-month forward exchange rates and the interest rates in the US and Japan are as indicated below, is there an arbitrage opportunity? If so, what trades must be made to take advantage of the opportunity, how profitable is it, and what is this type of arbitrage called?
USD/JPY exchange rates
spot rate 113.22
9-month 111.74
forward rate
interest rates
Japan 0.120%
US 1.740%