Assume the Bank of Germany borrowed Australian dollar (A$) 25 billion from the B
ID: 2731541 • Letter: A
Question
Assume the Bank of Germany borrowed Australian dollar (A$) 25 billion from the Bank of Australia before the global financial crisis of 2007. At that time, the rate was A$ 1.68751/€ or US$1.4786 /€. In 2012, the Bank of Australia repaid the money borrowed. At the time of repayment, the rate was A$1.22829/€ or US$ 1.25929/€:
A. Calculate the percentage of devaluation of euros against Australian dollars as well as euros against U.S. dollars.
B. Calculate the cost of intervention to the Bank of Germany in euros and U.S. dollars.
(Briefly show or explain how you arrived at your solutions)
Explanation / Answer
(A) Amount borrowed in A$=25b At the time of borrowing 1Euro=A$1.68751 At the time of repayment 1Euro=A$1.22829 Percentage of devaluation of Euro against A$=(1.68751-1.22829)/1.68751=0.2721 or 2.72% At the time of borrowing 1Euro=$1.4786 At the time of repayment 1Euro=$1.25929 Percentage of devaluation of Euro against $=(1.4786-1.25929)/1.4786=0.1483 or 14.83% (B) Cost of Intervention in billion Euros =25*(0.0272)=0.68 billion Euros Cost of Intervention in billion Dollars =25*(0.1483)=3.70 billion Dollars