Exchange Rate Determination
1. 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 _______%. A) depreciated; 5.80
B) depreciated; 4.00
C) appreciated; 5.80
D) appreciated; 4.00
SOLUTION: ($0.73 – $0.69)/$0.69 = 5.80%
2. If a currency’s spot rate market is _______, its exchange rate is likely to be _______ to a single large purchase or sale transaction. A) liquid; highly sensitive
B) illiquid; insensitive
C) illiquid; highly sensitive
D) none of these
3. _______ is not a factor that causes currency supply and demand schedules to change. A) Relative inflation rates
B) Relative interest rates
C) Relative income levels
E) All of these are factors that cause currency supply and demand schedules to change.
4. 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 _______.
5. An increase in U.S. interest rates relative to German interest rates would likely _______ the U.S. demand for euros and _______ the supply of euros for sale. A) reduce; increase
B) increase; reduce
C) reduce; reduce
D) increase; increase
6. Investors from Germany, the United States, and Britain frequently invest in each other based on prevailing interest rates. If British interest rates increase, German investors are likely to buy _______ dollar-denominated securities, and the euro is likely to _______ relative to the dollar. A) fewer; depreciate
B) fewer; appreciate
C) more; depreciate
D) more; appreciate
7.When the “real” interest rate is relatively low in a given country, then the currency of that country is typically expected to be:
A)weak, since the country’s quoted interest rate would be high relative to the inflation rate.
B)strong, since the country’s quoted interest rate would be low relative to the inflation rate.
C)strong, since the country’s quoted interest rate would be high relative to the inflation rate.
D)weak, since the country’s quoted interest rate would be low relative to the inflation rate.
8.Assume that the inflation rate becomes much higher in the U.K. relative to the U.S. This will place _______ pressure on the value of the British pound. Also, assume that interest rates in the U.K. begin to rise relative to interest rates in the U.S. The change in interest rates will place _______ pressure on the value of the British pound.
9.Baylor Bank believes the New Zealand dollar will appreciate over the next five days from $.48 to $.50. The following annual interest rates apply:
CurrencyLending Rate Borrowing Rate
New Zealand dollar (NZ$)6.80%7.25%
Baylor Bank has the capacity to borrow either NZ$10 million or $5 million. If Baylor Bank’s forecast if 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)?
1.Borrow $5 million.
2.Convert to NZ$: $5,000,000/$.48 = NZ$10,416,667.
3.Invest the NZ$ at an annualized rate of 6.80% over five days.
NZ$10,416,667 × [1 + 6.80% (5/360)]
4.Convert the NZ$ back to dollars:
NZ$10,426,505 × $.50 = $5,213,252