Fin 4802

Winter Study School 2015 – Exercises

Study Unit 4 (Slides 46 – 52)

Question 1

Percentage Depreciation. Assume the spot rate of the US dollar is R10.54. The expected spot

rate one year from now is assumed to be R10.51. What percentage depreciation does this

reflect?

Question 2

Inflation Effects on Exchange Rates. Assume that the SA inflation rate becomes high relative

to US dollar inflation. Other things being equal, how should this affect the

(a) SA demand for US dollars

(b) supply of US dollars for foreign currency, and

(c) equilibrium value of the US dollar?

Question 3

Interest Rate Effects on Exchange Rates. Assume South African interest rates fall relative to

British interest rates. Other things being equal, how should this affect the

(a) Rand demand for British pounds,

(b) supply of pounds for sale, and

(c) equilibrium value of the pound?

Question 4

Income Effects on Exchange Rates. Assume that the income level in the euro area rises at a

much higher rate than does the UK income level. Other things being equal, how should this

affect the:

(a) euro area demand for British pounds,

(b) supply of British pounds for sale, and

(c) equilibrium value of the British pound in terms of the euro?

Question 5

Trade Restriction Effects on Exchange Rates. Assume that the Japanese government

relaxes its controls on imports by Japanese companies. Other things being equal, how should

this affect the

(a) UK demand for Japanese yen,

(b) supply of yen for sale, and

(c) equilibrium value of the yen?

Question 6

Trade Deficit Effects on Exchange Rates. Every month, the SA trade deficit figures are

announced. Foreign exchange traders often react to this announcement and even attempt to

forecast the figures before they are announced.

•

Why do you think the trade deficit announcement sometimes has such an impact on foreign

exchange trading?

Study Unit 5 (Slides 58 – 71)

Question 1

Currency Options. Differentiate between a currency...