Exchange Rate

INTERNATIONAL ECONOMICS

EXCHANGE RATE HOMEWORK

1. You are the owner of tour financial centers and you are to avoid arbitrage. Estimate the missed exchange rates in order to avoid arbitrage.

CENTER US$ £ M ¥

New York (us $) 1 1.66 0.59 0.008

London (£) .6 1 .35 .0048

Bonn (M) 1.7 2.8 1 .0135

Tokio (¥) 125 207.5 73.7 1

2. In a two-country model, France and Germany, the supply and demand functions for German Marks in Paris are given by:

qs = 200 p – 50 qd = 925 - 100 p

q is the amount supplied (s) and demanded (d) of Marks and p is the price of the Mark in French Francs.

a) Supposing a flexible exchange rate system, estimate the exchange rate and the quantity of Marks at equilibrium.

Er= 200p –50 = 925 – 100 p = 3.25

qs = (200*3.25) – 50 = 600

b) Considering a parity of 2 Francs per Marc, determine the amount of Marks demanded and supplied at the official parity. What must the government do in order to keep this parity?

p= 2 France/Mark = 0.5 M/F

qs = 200*0.5 – 50 = 50 qd = 925 –(100*2) = 875

3. Thanks to your excellent grades, your family will send you to visit Spain. The exchange rates are 10.25 pesos/dollar, and 0.97 dollars/Euro. Estimate the amount of Euros that you will be able to spend if your family gives you 30,000 pesos.

$30.000 /10.25 = 2926.8 Dlls 2926.8 Dlls * 0.97 = 3017.3E

4. If the exchange rate is 10.15 pesos/dollar and 1.85 dollar/£, estimate the crossed exchange rate between the peso and the £.

10.15 $/Dlls*1.85Dlls/£ = 18.77$/£

5. The spot exchange rate in a market is 1 £ = 180 ¥ while the forward exchange rate in four months is 1 £= 200 ¥. Estimate the prime or the discount of the sterling pound with respect to the yen.

((180Y -200Y)/2)*((12/4)*100) = -3000