Exam 4: Exchange Rate Determination

If one foreign currency will appreciate against the dollar, then all foreign currencies will appreciate against the dollar but by different degrees.

Assume that British corporations begin to purchase more supplies from the U.S. as a result of several labor strikes by British suppliers. This action reflects:

Illiquid currencies tend to exhibit less volatile exchange rate movements than liquid currencies.

A large increase in the income level in Mexico along with no growth in the U.S. income level is normally expected to cause (assuming no change in interest rates or other factors) a(n) ____ in Mexican demand for U.S. goods, and the Mexican peso should ____.

The value of the Australian dollar (A$) today is $0.73. Yesterday, the value of the Australian dollar was $0.69. The Australian dollar ____ by ____%.

Financial flow foreign exchange transactions are more responsive to news than trade-related transactions.

Assume that Swiss investors have francs available to invest in securities, and they initially view U.S. and British interest rates as equally attractive. Now assume that U.S. interest rates increase while British interest rates stay the same. This would likely cause:

If the U.S. and Japan engage in substantial financial flows but little trade, ____ directly influences their exchange rate the most. If the U.S. and Switzerland engage in much trade but little financial flows, ____ directly influences their exchange rate the most.

Increases in relative income in one country vs. another result in an increase in the first country's currency value.

Any event that reduces the supply of Swiss francs to be exchanged for U.S. dollars should result in a(n) ____ in the value of the Swiss franc with respect to ____, other things being equal.

Assume that the British government eliminates all controls on imports by British companies. Other things being equal, the U.S. demand for pounds would ____, the supply of pounds for sale would ____, and the equilibrium value of the pound would ____.

Signals regarding future actions of market participants in the foreign exchange market sometimes result in overreactions.

Country X frequently engages in trade flows with the U.S. (such as imports and exports). Country Y frequently engages in financial flows with the U.S. (such as financial investments). Everything else held constant, an increase in U.S. interest rates would affect the exchange rate of Country X's currency more than the exchange rate of Country Y's currency.

Baylor Bank believes the New Zealand dollar will appreciate over the next five days from $.48 to $.50. The following annual interest rates apply: Currency Lending Rate Borrowing Rate Dollars 7.10 \% 7.50 \% New Zealand dollar (NZS) 6.80\% 7.25 \% Baylor Bank has the capacity to borrow either NZ$10 million or $5 million. If Baylor Bank's forecast is correct, what will its dollar profit be from speculation over the five-day period (assuming it does not use any of its existing consumer deposits to capitalize on its expectations)?

If a country experiences high inflation relative to the U.S., its exports to the U.S. should ____, its imports should ____, and there is ____ pressure on its currency's equilibrium value.

Assume the following information regarding U.S. and European annualized interest rates: $\begin{array} { l c c } \text { Eurrenc } & \text { Lendine Rtite } & \text { Earrawine Ratp } \\\text { U.S. Dallw (\$) } & 6.73 \% & 7.20 \% \\\text { Eura (E) } & 6.80 \% & 7.28 \%\end{array}$ Trensor Bank can borrow either $20 million or €20 million. The current spot rate of the euro is $1.13. Furthermore, Trensor Bank expects the spot rate of the euro to be $1.10 in 90 days. What is Trensor Bank's dollar profit from speculating if the spot rate of the euro is indeed $1.10 in 90 days?

Assume that Canada places a strict quota on goods imported from the U.S. and that the U.S. does not retaliate. Holding other factors constant, this event should immediately cause the supply of Canadian dollars to be exchanged for U.S. dollars to ____ and the value of the Canadian dollar to ____.

Any event that reduces the U.S. demand for Japanese yen should result in a(n) ____ in the value of the Japanese yen with respect to ____, other things being equal.

Movements of foreign currencies tend to be more volatile for shorter time horizons.

The standard deviation should be applied to values rather than percentage movements when comparing volatility among currencies.