The impact of the fixed exchange rate on the official reserve.

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Chapter 25, Problem 7RQ

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The impact of the fixed exchange rate on the official reserve.

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Suppose that the government of China is currently fixing the exchange rate between the U.S. dollar and the Chinese yuan at a rate of $1 = 6 yuan. Also suppose that at this exchange rate, the people who want to convert dollars to yuan are asking to convert $10 billion per day of dollars into yuan, while the people who are wanting to convert yuan into dollars are asking to convert 36 billion yuan into dollars. What will happen to the size of China’s official reserves of dollars? a. Increase. b. Decrease. c. Stay the same.

Suppose that you hold a piece of land in the city of London that you may want to sell in one year. As a U.S. resident, you are concerned with the dollar value of the land. Assume that if the British economy booms in the future, the land will be worth £2,000, and one British pound will be worth $3.20. If the British economy slows down, on the other hand, the land will be worth less, say, £1,500, but the pound will be stronger, say, $3.30 per pound. You feel that the British economy will experience a boom with a 60 percent probability and a slowdown with a 40 percent probability. Required: Estimate your exposure (b) to the exchange risk. Note: Negative amount should be indicated by a minus sign. Compute the variance of the dollar value of your property that is attributable to exchange rate uncertainty.

Q2: The current exchange rate between Canadian dollar and British Pound is 1 Pound = 1.55 C$. If the C$ weakens by 1.25% relative to the British pound, how much will be C$ per British Pound? ___________.What is the percentage that British pound appreciates? ______________%. (Please pay attention to this %, if your answer is like 22.45%, you should input 22.45)