05 Jun Question Complete “Study Questions” 10 and 11 at the en
Question
Complete “Study Questions” 10 and 11 at the end of chapter 10 in the textbook. Complete “Study Questions” 9-16 at the end of chapter 11 in the textbook. You are not required to submit this assignment to Turnitin.
CHAPTER 10
10. Table 10.7 summarizes hypothetical transactions, in billions of U.S. dollars, that took place during a given year. a. Calculate the U.S. merchandise trade, services, goods and services, income, unilateral transfers, and current account balances. b. Which of these balances pertains to the net foreign investment position of the United States? How would you describe that position? 11. Given the hypothetical items shown in Table 10.8, determine the international investment position of the United States. Is the United States a net-creditor nation or a net-debtor nation?
CHAPTER 11
9. If the exchange rate changes from $1.70 5 £1 to $1.68 5 £1, what does this mean for the dollar? For the pound? What if the exchange rate changes from $1.70 5 £1 to $1.72 5 £1?
10. Suppose $1.69 5 £1 in New York and $1.71 5 £1 in London. How can foreign-exchange arbitragers profit from these exchange rates? Explain how foreign-exchange arbitrage results in the same dollar/pound exchange rate in New York and London.
11. Table 11.11 shows supply and demand schedules for the British pound. Assume that exchange rates are flexible. a. The equilibrium exchange rate equals . At this exchange rate, how many pounds will be purchased, and at what cost in terms of dollars? b. Suppose the exchange rate is $2 per pound. At this exchange rate, there is an excess (supply/demand) of pounds. This imbalance causes (an increase/a decrease) in the dollar price of the pound, which leads to (a/ an) in the quantity of pounds supplied and (a/an) in the quantity of pounds demanded. c. Suppose the exchange rate is $1 per pound. At this exchange rate, there is an excess (supply/demand) for pounds. This imbalance causes (an increase/ a decrease) in the price of the pound, which leads to (a/ an) in the quantity of pounds supplied and (a/an) in the quantity of pounds demanded.
12. Suppose the spot rate of the pound today is $1.70 and the three-month forward rate is $1.75. a. How can a U.S. importer who has to pay 20,000 pounds in three months hedge her foreign-exchange risk? b. What occurs if the U.S. importer does not hedge and the spot rate of the pound in three months is $1.80?
13. Suppose the interest rate (on an annual basis) on three-month Treasury bills is 10 percent in London and 6 percent in New York, and the spot rate of the pound is $2. a. How can a U.S. investor profit from uncovered interest arbitrage? b. If the price of the three-month forward pound is $1.99, will a U.S. investor benefit from covered interest arbitrage? If so, by how much? 14. Table 11.12 gives hypothetical dollar/franc exchange values for Wednesday, May 5, 2008. a. Fill in the last two columns of the table with the reciprocal price of the dollar in terms of the franc. b. On Wednesday, the spot price of the two currencies was dollars per franc, or francs per dollar. c. From Tuesday to Wednesday, in the spot market the dollar (appreciated/depreciated) against the franc; the franc (appreciated/depreciated) against the dollar. d. In Wednesday’s spot market, the cost of buying 100 francs was dollars; the cost of buying 100 dollars was francs. e. On Wednesday, the 30-day forward franc was at a (premium/discount) of dollars, which equaled percent on an annual basis. What about the 90-day forward franc?
15. Assume a speculator anticipates that the spot rate of the franc in three months will be lower than today’s three-month forward rate of the franc, $0.50 5 1 franc. a. How can this speculator use $1 million to speculate in the forward market? b. What occurs if the franc’s spot rate in three months is $0.40? $0.60? $0.50?
16. You are given the following spot exchange rates: $1 5 3 francs, $1 5 4 schillings, and 1 franc 5 2 schillings. Ignoring transaction costs, how much profit could a person make via three-point arbitrage?
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