FIN 565 Week 2 Homework

1. Question: Percentage Depreciation Assume the spot rate of the British pound is $1.73. The expected spot rate 1 year from now is assumed to be $1.66. What percentage depreciation does this reflect? 2. Question: Inflation Effects on Exchange Rates Assume that the U.S. inflation rate becomes high relative to Canadian inflation. Other things being equal, how should this affect the (a) U.S. demand for Canadian dollars, (b) supply of Canadian dollars for sale, and (c) equilibrium value of the Canadian dollar? 3. Question: Effects of Real Interest Rates What is the expected relationship between the relative real interest rates of two countries and the exchange rate of their currencies? 4. Question: Forward versus Futures Contracts Compare and contrast forward and futures contracts. 5. Question: Currency Options Differentiate between a currency call option and a currency put option. 6. Question: Exchange Rate Systems Compare and contrast the fixed, freely floating, and managed float exchange rate systems. What are some advantages and disadvantages of a freely floating exchange rate system versus a fixed exchange rate system? 7. Question: DirectInterventionHowcanacentralbankusedirectinterventiontochangethevalueofa currency? Explain why a central bank may desire to smooth exchange rate movements of its currency. 8. Question: IndirectInterventionHowcanacentralbankuseindirectinterventiontochangethevalueofa currency?