International Business Strategy

Problem Set 4
Exchange Rates

Question 1
The following table (taken from www.ecb.euopa.eu) depicts selected exchange
rates of the Euro.

(a) Determine the exchange rate of the Japanese Yen and the Swiss Franc
versus the Euro in price quotation.

(b) Determine the bilateral exchange rate of the Swedish Krona versus the
Danish Krone.

RWTH Aachen University Winter Term 2023/2024

 International Business Strategy

(c) Suppose the countries of the Eurozone only trade with the United
States, Japan and the United Kingdom. Exports to the United States
are 50 EUR, to Japan and the United Kingdom 25 EUR each. Deter-
mine the effective exchange rate of the EUR (in quantity and price
quotation). Suppose now that trade with the UK declines to 10 EUR.
How does the effective exchange rate change?

Question 2
The following figure (taken from www.ecb.euopa.eu) shows the development
of the exchange rate of the British Pound versus the EUR (in price quotation).
Does this figure show an appreciation or a depreciation of the Pound? What
can you say about the interest rates in both countries if the uncovered interest
parity holds?

RWTH Aachen University Winter Term 2023/2024

 International Business Strategy

Question 3
Consider a small open economy that imports cars and exports rice. There
are no other goods. The country sets a tariff on the imports of cars while
rice can be traded internationally without tariff restrictions. Apart from the
tariff there are no other barriers to trade.

(a) Which deviation from Purchasing Power Parity do you expect for the
currency of the small country?

(b) Suppose the country gradually lowers the tariff rate. What can you
say about Purchasing Power Parity in its absolute and its comparative
form?

RWTH Aachen University Winter Term 2023/2024