Foreign Exchange Problems Below are the major exchange rates copied from XE.com
ID: 1211555 • Letter: F
Question
Foreign Exchange Problems
Below are the major exchange rates copied from XE.com on 4/12/2016 @ 11 am. They are; U.S. Dollar (USD), Euro (EUR), British Pound (GBP), Indian Rupee (INR), Australian Dollar (AUD), Canadian Dollar (CAD) and Japanese Yen (JPY). There are two lines for each pair of currencies; the top line shows the price of one unit of the currency in the left-hand column in terms of the currency at the top of the column (e.g. one U.S. dollar cost 66.38 Indian rupees); the second line shows this the other way around (e.g. one Indian rupee costs 0.01506 U.S. dollars).
1. Since April of 2014 there has been an increase in Canadian preference for European goods, causing to exchange rate to change by 7% to the value(s) shown above. Draw the graph of the foreign exchange market from the Canadian perspective showing what has happened between 2014 and 2016.
2. Repeat exercise #1, except from the European perspective.
3. Since October of 2013 Britain has experience a rate of inflation that is 3% more than that in the U.S. If the “relative purchasing power parity” holds, show how the exchange rate has changed from 2013 to 2016 from the British perspective.
4. Repeat exercise #3, except from the U.S. perspective.
5. In late April of 2016 the Japanese decide to impose tariffs on goods shipped there from India. Consequently the rupee is expected to depreciated by 6% over the next two years. Show what we expect to be happening in the foreign exchange market from 2016 to 2018 from the Indian perspective.
6. Repeat exercise #4, except from the Japanese perspective.
Suppose we create a basket of foreign currencies made up of the following:
45 EUR 38 GBP 1500 INR 25 AUD 35 CAD 2500 JPY
7. What is the dollar value of this basket on April 12, 2016?
Suppose that in one year, the USD can buy the following amounts of these foreign currencies:
[For example, one U.S. dollar can buy 1.2606 Australian dollars.]
8. What is the dollar value of the currency basket on April 12, 2017?
9. Has the dollar appreciated or depreciated against this basket of currencies? By how much?
10. Against which specific currencies is the dollar stronger?
11. Against which specific currencies is the dollar weaker?
12. Draw a graph of the foreign exchange market where the foreign exchange is this basket of currencies (from the U.S. perspective) showing what has happened for 2016 to 2017.
need help getting these answers:
Answer Key for Foreign Exchange Problems:
1. The demand for euros rises. Exchange rate rises from 1.358 to 1.453 (Canadian dollars per euro)
2. The supply of C$ rises. Exchange rate falls from .736 to .688 (euros per C$)
3. Any combination of increasing demand or decreasing supply raises rate from .681 to .7015 (pounds per dollar)
4. Any combination of increasing supply or decreasing demand lowers rate from 1.468 to 1.425 (dollars per pound)
5. Falling supply raises rate from .6109 to .6476 (rupees)
6. Falling demand lowers rate from 1.64 to 1.54 (yen)
7. Basket value = $197.53
8. Basket value = $200.66
9. The dollar has depreciated by 1.583%
10. The dollar is stronger against the euro, pound and C$
11. The dollar is weaker against the rupee, Australian $ and yen
12. Show as some combination of rising demand and falling supply for this basket of foreign currencies.
Explanation / Answer
1.
The exchange rate is the price of foreign currency in terms of home currency. The international trade between two countries allows exchange of goods and services. This exchange between two countries involves the exchange of paper money or currency. To conduct the trade one trading partner need the currency of other. The exchange rate determines how much home currency will need to purchase a basket of good that is priced as one unit of foreign currency.
The currencies are bought and sold in the foreign exchange market. The equilibrium price of foreign currency is determined through the demand and supply of home currency in the exchange market. If the price of the foreign currency relative to home currency rises, that is now it needed more of the home currency to purchase one unit of foreign currency, the home currency depreciates. On the other hand, if the price of the foreign currency relative to home currency falls, that is now it needed less of the home currency to purchase one unit of foreign currency, the home currency appreciates.
The demand for foreign exchange is derived from the purchase of foreign goods by the domestic consumer. The domestic consumer supply domestic currency in the exchange market to acquire foreign currency to purchase foreign goods, services and assets. On the other hand, the supply for foreign exchange is derived from the sales of foreign goods by the domestic consumer. The foreign consumer demand domestic currency in the exchange market to acquire foreign currency to purchase domestic goods and services and assets.
Therefore, as the demand for foreign good increases, the domestic deman more foreign currency. this will increases the demand for Euro. Given the supply the rise in demand will increase the exchange rate for the canadian dollar per Euro. Thus canadian dollar apprciates against Euro.
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2.
The supply for foreign exchange is derived from the sales of foreign goods by the domestic consumer. The foreign consumer demand domestic currency in the exchange market to acquire foreign currency to purchase domestic goods and services and assets.
By similar logic, the Canadian consumer will need Euro to purchase European goods. This will increase the supply of Canadian dollar in European exchange market. The increase in foreighn currency given its demand will decrease the exchange rate of Euro per canadian dollar. Thus, Euro will depriciate against Canadian dollar.
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3.
Inflation in Britain more than in US made it a better place for business ventures. The investment in US increases. This increases the demand for dollar and increases the exchange rate of dollar relative to pound. The pound depreciates in the exchange market.
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4.