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Week 11 -Exchange rate (questions)
Week 11 -Exchange rate (questions)
1. You have access to the following three spot exchange rates: $0.01/yen
$0.20/krone
25 yen/krone
You start with dollars and want to end up with dollars.
How would you engage in arbitrage to profit from these three rates? What is the
profit for each dollar used initially?
2. China faces relatively inelastic demand for oil. Most of China’s oil demand is met through
imports from oil producing countries. Do you think the depreciation of Chinese yuan against
the US dollar will have a favorable impact on its balance of payments in the short run?
Explain.
3. In Munich, a bratwurst costs 5 euros; a hot dog costs $4 at Boston’s Fenway Park. At an
exchange rate of $1.05/per euro, what is the price of a bratwurst in terms of a hot dog? All
else equal, how does this relative price change if the dollar depreciates to $1.25 per euro?
Compared with the initial situation, has a hot dog become more or less expensive relative to
a bratwurst?
5. In 2014, Germany’s Volkswagen (VW) makes a contract with Malaysia to supply 100 cars in
2015. €700,000 is to be paid on the date of supply. Suppose today’s rate is Malaysian ringgit
(MYR) 3>€ and the expected exchange rate for next year is MYR 3.15>€. Suppose after the
deal, the rate changed to MYR3.10>€. In this case, what will happen to VW’s expected gain
and loss in bonus in 2015?
6. The current interest rate on one year’s Indian rupee deposit is 5 percent and yen (¥) deposit is
12 percent. The current ¥>rupee exchange rate is 2 and after a year, it is expected to exceed
2.4. In this case, which currency would you choose for a higher expected rate of return a year
later?
7. The price levels in Canada and Switzerland were each 110 in 1995, and the nominal spot rate
was 1.5 Swiss francs per Canadian dollar in 1995. The Canadian price level rose to be 160 in
2005, the Swiss price level rose to be 130 in 2005, and the spot exchange rate was 1.3 Swiss
francs per Canadian dollar in 2005.
Did the Canadian dollar experience a real appreciation or a real depreciation (relative to the
Swiss franc) between 1995 and 2005? (As part of your answer, use a calculation of the real
exchange rate.)
8. Based on the following figures for Uzbekistan for the period 2020-2023, explain how trade
dynamics and other macroeconomic indicators have been shaping the real effective exchange
rates (REER). Also discuss how changes in REER are affecting nominal exchange rate in
Uzbekistan.