Jim Logan, owner of the Sports Exports Company is concerned about the value of the British pound over time because his firm receives pounds as payment for footballs exported to the United Kingdom. He recently read that the Bank of England (the central bank of the United Kingdom) is likely to intervene directly in the foreign exchange market by flooding the market with British Pounds
1. Forecast whether the British pound will weaken or strengthen based on the information provided.
2. How would the performance of Sports Exports Company be affected by the Bank of England’s policy of massive buying of British pounds in the foreign exchange market (assuming that it does not hedge its exchange rate risk)?
3. What is the difference between a currency board and dollarization? Name a country that uses a currency board and a currency that has dollarization.
4. Assume that Italy wants to change the prevailing spot rate of its currency (euro) to improve the Italian economy while Switzerland wants to change the prevailing value of its currency (Swiss franc) in order to improve the Swiss economy. Which of these two countries is more likely to have more control over its currency? Briefly explain.