ECN4181
Bab 11
Foreign Exchange
Bab 11 Foreign Exchange Market
Chapter 12 Foreign Exchange (9th edition, Carbaugh)
Chapter 11 Foreign Exchange (10th edition, Carbaugh)
1. If the exchange rate changes from $1.70 = £1 to $1.68 = £1, what does this mean for the
dollar? For the pound? What if the exchange rate changes from $1.70 = £1 to $1.72 = £1?
Solution:
$1.70 = £1 to $1.68 = £1 Æ $ appreciates against £ or £ depreciates against $
$1.70 = £1 to $1.72 = £1 Æ $ depreciates against £ or £ appreciates against $.
2. Table below shows supply and demand schedules for the British pound. Assume that
exchange rates are flexible.
Table: Supply and Demand of British Pounds
Quantity of Pounds Supplied
Dollars per pound ($/£)
50
$2.50
40
2.00
30
1.50
20
1.00
10
0.50
Quantity of Pounds Demanded
10
20
30
40
50
a. The equilibrium exchange rate equals ___________. At this exchange rate, how many pounds
will be purchased, and at what cost in terms of dollars?
b. Suppose the exchange rate is $2 per pound. At this exchange rate, there is an excess
(supply/demand) of pounds. This imbalance causes (an increase/ a decrease) in the dollar
price of the pound, which leads to (a/an) ______________ in the quantity of pounds supplied
and (a/an) ______________ in the quantity of pounds demanded.
c. Suppose the exchange rate is $1 per pound. At this exchange rate, there is an excess
(supply/demand) of pounds. This imbalance causes (an increase/ a decrease) in the dollar
price of the pound, which leads to (a/an) ______________ in the quantity of pounds supplied
and (a/an) ______________ in the quantity of pounds demanded.
Solution:
a. $1.50/£. 30 £are purchased at a cost of $45.
b. Excess supply, 20£. $ price of the £ ↓, ↓, ↑.
c. Excess demand, 20 £. $ price of the £ ↑,↑,↓.
3. Table below gives hypothetical dollar/franc exchange values for Wednesday, May 5, 1999.
Table: Dollar/Franc Exchange Values
US$ Equivalent
Currency per US$
Wednesday
Tuesday
Wednesday
Tuesday
Switzerland (franc)
0.5851
0.5846
30-day forward
0.5853
0.5848
90-day forward
0.5854
0.5849
180-day forward
0.5851
0.5847
TSH
1
ECN4181
Bab 11
Foreign Exchange
a. Fill in the last two columns of the table with the reciprocal price of the dollar in terms of the
franc.
b. On Wednesday, the spot price of the two currencies was ________ dollars per franc, or
________ franc per dollar.
c. From Tuesday to Wednesday, in the spot market the dollar (appreciated/ depreciated) against
the franc; the franc (appreciated/ depreciated) against the dollar.
d. In Wednesday’s spot market, the cost of buying 100 francs was _____ dollars; the cost of
buying 100 dollars was ______ francs.
e. On Wednesday, the 30-day forward franc was at a (premium/discount) of _____ dollars,
which equaled ________ percent on an annual basis? What about the 90-day forward franc?
Solution:
a. 1.7090, 1.7105, 1.7084, 1.7099, 1.7081, 1.7096, 1.7090, 1.7103.
b. $0.5851 per franc, $1.7090 francs per dollar.
c. Depreciated, appreciated.
d. $58.51, 170.9 francs.
e. The 30-day forward franc was at a premium of $.0002 which equals 0.4% on an annual basis.
The 90-day forward franc was at a premium of $.0003 which equals 0.2% on an annual basis.
4. Complete the following cross-rate table.
Australia $
Britain £
Canadian $
Switzerland Sfr
United States $
A$
0.42
0.95
0.90
0.65
£
2.35
2.23
2.11
1.54
C$
1.06
0.45
0.94
0.69
Sfr
1.12
0.47
1.06
0.73
$
1.53
0.65
1.45
1.37
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5. Suppose the following situation prevails in the foreign exchange and Erocurrency markets for
the euro (€) and the British pound (£).
One-year Eurocurrency rates:
euro
3.125%
British pound
4.250%
Exchange rates:
Spot
1.5245 €/£
One-year forward
1.4575 €/£
Explain how an individual would profit from financial arbitrage in this situation.
Solution:
Because (1.03125) > (1.04250)(1.4575/1.5245) = 0.9967, an arbitrage opportunity exists in this
example if one were to borrow the pound and lend the euro.
TSH
2

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