One should expect the forward exchange market to flourish Question 6 options: A) under a flexible exchange rate regime. B) only under a gold standard C) under both fixed and flexible exchange rate regimes D) under neither fixed nor flexible exchange rate regimes
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- List some advantages and disadvantages of the different exchange rate policies.If the exchange rate is 1 US dollar= 10 Mexican pesos, then 1 Mexican peso equals ____ a)20 cents in US currency b) 1 cent in US currency c) 1 US dollar d) 5 cents in US currency e) None of the choices is correctConsider a Dutch investor with 1,000 euros to place in a bank deposit in either the Netherlands or Great Britain. The (one-year) interest rate on bank deposits is 1% in Britain and 5% in the Netherlands. The (one-year) forward euro–pound exchange rate is 1.65 euros per pound, and the spot rate is 1.5 euros per pound. Answer the following questions, using the exact equations for uncovered interest parity (UIP) and covered interest parity (CIP) as necessary. What is the euro-denominated return on Dutch deposits for this investor? What is the (riskless) euro-denominated return on British deposits for this investor using forward cover? Is there an arbitrage opportunity here? Explain why or why not. Is this an equilibrium in the forward exchange rate market? If the spot rate is 1.5 euros per pound, and interest rates are as stated previously, what is the equilibrium forward rate, according to CIP? Suppose the forward rate takes the value given by your answer to (d). Compute the forward…
- Under a fixed exchange rate regime, the value of the currency is pegged to a specific currency. This provides stability and predictability for international businesses when engaging in cross-border transactions and making long-term investment decisions. Companies can better plan and forecast their international operations without worrying about sudden exchange rate fluctuations. Businesses with significant cross-border trade and investment activities can benefit from reduced currency risk as their transactions are shielded from short-term volatility in exchange rates. This can be particularly advantageous when dealing with countries with historically unstable currencies. Fixed exchange rates can act as a constraint on monetary policies, preventing excessive money supply growth that may lead to inflation. This can create a more stable economic environment for businesses to operate in. In a floating exchange rate system, currency values are determined by market forces, primarily supply…Describe how the three transactions below would affect the exchange rates of the Mauritian rupee, assuming that Mauritius has a free floating exchange rate regime:(i) Oxenham Ltd imports a year's supply of French champagne. Payment in euros is due immediately. (ii) Omnicane(a local company) has successfully privately placed a bond issue of USD100m to foreign institutional investors. The first coupon is due in six months’ time and the rate of interest is 2 % per annum.The proceeds have been used to repay a commercial bank for a USD bank loan which came to maturity.(iii) Air Mauritius (MK) buys a Boeing 747 for USD 160 million. As part of thedeal, Boeing arranges a loan to MK for the purchase amount from the U.S.Export-Import Bank. The loan is to be paid back over the next ten years with a two-year grace period.If the exchange rate is 1 US dollar = 20 Mexican pesos, then 1 Mexican peso equals --------- a) 5 cents in US currency b) 20 cents in US currency c) None of the choices is correct d) 1 US dollar e) 10 cents in US currency
- 10) Assume the overall US market price for retail chocolate is $7.00 per pound, and in order to attract "Chocoholic Tourists" from Europe, the Hershey company decides to lower its price to $6.00 per pound. Based on the Purchasing Power Parity theory of exchange rates, what will eventually happen the effective price of chocolate for European buyers, assuming the Euro-USD exchange rate starts at 1€ Per $1.00? Using the chart below, determine the exchange rate at which Hershey's effective chocolate prices will match those of the rest of the chocolate market? # of Lbs Chocolate Exchange Exchange Chocolate 200 Effective budget in Rate Euros Rate budget in Price Euro Euro/$ $/Euro $'s Euros will buy 200.00 € 1.00 1.00 $200 33.33 6.00 € 200.00 € 1.05 0.95 $190 31.75 6.30 € 200.00 € 1.10 0.91 $182 30.30 6.60 € 200.00 € 1.15 0.87 $174 28.99 6.90 € 200.00 € 1.20 0.83 $167 27.78 7.20 € 200.00 € 1.25 0.80 $160 26.67 7.50 € 200.00 € 1.30 0.77 $154 25.64 7.80 € 200.00 € 1.35 0.74 $148 24.69 8.10 €A US firm exporting to Mexico has set a price of MXN 2000 for a product with variable cost of $60. At an exchange rate of MXN 20/USD 1, per unit contribution is $40. What is the impact on per unit contribution if the exchange rate changes to MXN 25/USD 1, all else being equal? decrease 25% increase 50% increase 25% no change decrease 50%Which of the following asserts that the forward exchange rate is equal to the expected future spot exchange rate? a) Purchasing power parity b) Foreign exchange expectations c) Interest rate parity d) International Fisher relationship
- In France, one kilogram of macadamia nuts costs 10.5Euro and 10 Dollars in Canadian in Canada. According to the law of one price, the expected exchange rate between the Euro and the Canadian would be_____ 1.5Euro/$ 0.12Dollar/Euro 1.67 Dollar/Euro 0.67 Euro/DollarThe two main arguments produced in favour of adopting a fixed exchange rate system are most commonly known as: (a) The devaluation and export promotion arguments. (b) The integration and anchor arguments; (c) The integration and flexibility arguments; (d) The devaluation and import substitution arguments Which one is correct? Please provide your reasoning. .Suppose the nominal exchange rate (given as foreign currency per unit of U.S. currency as in class) rises. If purchasing power parity holds, this could mean that domestic prices __________________ or foreign prices ________________ with all else unchanged. Group of answer choices A) increased, decreased B) decreased, decreased C) increased, increased D) decreased, increased