ADEL MOHAMED

20132938

INTERNATIONAL FINANCE
ASSIGNMENT 3
Dr Heba Ashraf
 1) Briefly describe how various economic factors can affect the equilibrium
exchange rate of the Egyptian pound value with respect to that of the dollar
The Government can use direct intervention by buying or selling currencies in the foreign exchange
market, and with that, it affects demand and supply conditions which affects the equilibrium values of
the currencies, when a government buys a currency in the foreign exchange market, it puts upward
pressure on the currency’s equilibrium value. On the other hand, when a government sells a currency in
the foreign exchange market, it puts downward pressure on the currency’s equilibrium value. The
Government can use indirect intervention by influencing the economic factors that affect the
equilibrium exchange rates.

2) A recent shift in the interest rate differential between Egypt and Country A
had a large effect on the value of Currency A. However, the same shift in the
interest rate differential between Egypt and Country B had no effect on the
value of Currency B. Explain why the effects may vary.
The annualized interest rate differential between two countries can vary among debt maturities, and the
same thing goes for the annualized forward premiums.

3) Overseas co.can borrows $5 million at 6 per cent annualized. It can use the
proceeds to invest in Canadian dollars at 9 percent annualized over a 6-day
period. The Canadian dollar is worth $.95 and is expected to be worth $.94
in 6 days. Based on this information, overseas co borrows U.S. dollars and
invests in Canadian dollars? What would be the gain or loss in dollars?
((5-0.6)/0.6) x (360/6) =44%

4) Assume that Egypt’s inflation rate becomes high relative to France’s

inflation. Other things being equal, how should this affect the (a) Egyptian
demand for euros, (b) supply of euros for sale, and (c) equilibrium value of
the euro?
a) The Egyptian demand for Euros will decrease
b) Supply for Euro will Increase due to the less demand
c) The Equilibrium value for Euro will increase.