Case Number Three: Part a: One Mark for Each Statement a. For each of the following six scenarios, state whether the value of the dollar will appreciate, depreciate, or remain the same relative to the Japanese yen. Explain each answer. Assume that exchange rates are free to vary and that other factors are held constant. The growth rate of national income is higher in the United States than in Japan. b. Inflation is higher in the United States than in Japan. c. Prices in Japan and the United States are rising at the same rate. d. Real interest rates in the United States rise relative to real rates in Japan. e. The United States imposes new restrictions on the ability of foreigners to buy American companies and real estate. f. U.S. wages rise relative to Japanese wages, while American productivity falls behind Japanese productivity. g. Japan exports to US is higher than US export to Japan. Part b: One Mark for Each Question On Friday, September 13, 1992, the lira was worth DM 0.0013065. Over the weekend, the lira devalued against the DM to DM 0.0012613. a. By how much had the lira devalued against the DM? b. By how much had the DM appreciated against the lira? c. Suppose Italy borrowed DM 4 billion, which it sold to prop up the lira. What were the Bank of Italy's lira losses on this currency intervention? d. Suppose Germany spent DM 24 billion in an attempt to defend the lira. What were the Bundesbank's DM losses on this currency intervention?
Case Number Four Part a: One Mark for Each Question Suppose today's exchange rate is $1.55/€. The six-month interest rates on dollars and euros are 6% and 3%, respectively. The six-month forward rate is $1.5478. A foreign exchange advisory service has predicted that the euro will appreciate to $1.5790 within six months. a. How would you use forward contracts to profit in the above situation? b. How would you use money market instruments (borrowing and lending) to profit? Which alternatives (forward contracts or money market instruments) would you prefer? Why? c. Part b: One Mark for Each Question During the currency crisis of September 1992, the Bank of England borrowed DM 33 billion from the Bundesbank when a pound was worth DM 2.78, or $1.912. It sold these DM in the foreign exchange market for pounds in a futile attempt to prevent a devaluation of the pound. Il repaid these DM at the post-crisis rate of DM 2.50:£l. By then, the dollar-pound exchange rate was $1.782:£1. a. By what percentage had the pound sterling devalued in the interim against the Deutsche mark? Against the dollar? b. What was the cost of intervention to the Bank of England in pounds? In dollars?
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