International Finance

Table of Contents

QUESTION 1 2

QUESTION 2 5

REFERENCES 8

QUESTION 1

1) Assume the spot rate of the British pound is USD1.73/£1.00. The expected spot rate one year from now is assumed to be USD1.66/£1.00. What percentage depreciation does this reflect?

Analyzing the answer:

St-St-1St-1

$1.66-$1.73$1.73

= -4.05 %

The expected rate depreciation is = 4.05%

Therefore:

This answer is explained based on the “Purchase Power Parity” (PPP) theory. Basically this economic theory goes back to “David Ricardo” in the XIX century, but within’ the days it got developed in modern form & popularized by the German prof. Gustav Cassel in 1918.

The spirit of this theory is to determine the amount of a country’s currency in relation to another country’s currency required to buy the same products or services in their markets.

2) 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?

If the U.S inflation rate is higher than Canadian inflation, there will be a rise in the price of U.S. products. Then the demand for Canadian dollars will increase as U.S. customers will purchase further Canadian products. Furthermore, the supply of Canadian dollars for sale will decrease due to a fall in the Canadian’s demand of U.S products and thus causing the value of Canadian dollar to increase.

3) Assume U.S. interest rates fall relative to British interest rates. Other things being equal, how should this affect the (a) U.S. demand for British pounds, (b) supply of pounds for sale, and (c) equilibrium value of the pound?

With a fall in the interest rates of U.S with regards to the interest rates of Britain, there will be a rise in the demand of British pounds and its supply for sale will diminish. This will...