Exchange Rate Movements
FIN340 304
Tutorial week 3 Questions
1. How can a central bank use direct intervention to change the value of a currency? Explain why a central bank may desire to smooth exchange rate movements of its currency.. 2. Should the governments of Asian countries allow their currencies to float freely? What would be the advantages of letting their currencies float freely? What would be the disadvantages? 3. What is the impact of a weak home currency on the home economy, other things being equal? What is the impact of a strong home currency on the home economy, other things being equal? 4. Assume the Hong Kong dollar (HK$) value is tied to the U.S. dollar and will remain tied to the U.S. dollar. Last month, a HK$ = 0.25 Singapore dollars. Today, a HK$=0.30 Singapore dollars. Assume that there is much trade in the computer industry among Singapore, Hong Kong, and the U.S. and that all products are viewed as substitutes for each other and are of about the same quality. Assume that the firms invoice their products in their local currency and do not change their prices.
a. Will the computer exports from the U.S. to Hong Kong increase, decrease, or remain the same? Explain.
b. Will the computer exports from Singapore to the U.S. increase, decrease, or remain the same? Explain.
NOTE: Explain in great detail with example and diagram if necessary. All presentation must be prepared in Power point slide.
1. A) Central Banks can use direct intervention to change the value of currencies. Direct intervention can divide into two parts. It is sterilized intervention and non-sterilized intervention. In the sterilized intervention, Treasury securities are purchased or sold at the same time to maintain the money supply. But non-sterilized intervention is means the central bank intervenes in the foreign exchange market without adjusting for the change in the money supply. Now, we will us an example to illustrated it.
Tutorial week 3 Questions
1. How can a central bank use direct intervention to change the value of a currency? Explain why a central bank may desire to smooth exchange rate movements of its currency.. 2. Should the governments of Asian countries allow their currencies to float freely? What would be the advantages of letting their currencies float freely? What would be the disadvantages? 3. What is the impact of a weak home currency on the home economy, other things being equal? What is the impact of a strong home currency on the home economy, other things being equal? 4. Assume the Hong Kong dollar (HK$) value is tied to the U.S. dollar and will remain tied to the U.S. dollar. Last month, a HK$ = 0.25 Singapore dollars. Today, a HK$=0.30 Singapore dollars. Assume that there is much trade in the computer industry among Singapore, Hong Kong, and the U.S. and that all products are viewed as substitutes for each other and are of about the same quality. Assume that the firms invoice their products in their local currency and do not change their prices.
a. Will the computer exports from the U.S. to Hong Kong increase, decrease, or remain the same? Explain.
b. Will the computer exports from Singapore to the U.S. increase, decrease, or remain the same? Explain.
NOTE: Explain in great detail with example and diagram if necessary. All presentation must be prepared in Power point slide.
1. A) Central Banks can use direct intervention to change the value of currencies. Direct intervention can divide into two parts. It is sterilized intervention and non-sterilized intervention. In the sterilized intervention, Treasury securities are purchased or sold at the same time to maintain the money supply. But non-sterilized intervention is means the central bank intervenes in the foreign exchange market without adjusting for the change in the money supply. Now, we will us an example to illustrated it.