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Please answer all of the homework questions below before the due date. Thank you very much.
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Running head: International Finance and Trade Fall 2017
International Finance and Trade Fall 2017:
Student’s name:
Institution affiliation:
Date:
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International Finance and Trade Fall 2017
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Q1) First, current account of a nation is the sum of balance of trade which is exports
minus imports, net income from foreign countries and net current transfers.
a) Paying interest on a French government bond will reduce net income from foreign
countries thus it will reduce US current account.
b) Selling a Rolex watch to an individual in China will increase exports by the value of
the watch. It will increase US balance of trade and current account will also increase.
Q2) A stronger dollar will make exports expensive and imports cheaper. When the dollar
is strong, it buys more foreign currencies and more imports will be afforded. Foreign currency
will buy less dollars making exports expensive. The result is that imports will be more than
exports and US current deficit will increase.
Q3) In 2000, 1 Canadian dollar was equivalent to $0.806. Today, one Canadian dollar is
equivalent to $0.7753. It implies that in 2000, Canadian dollar was capable of buying more USD
than today. We conclude that Canadian dollar is weakening relative to USD.
Q4) The US dollar is based on a stronger economy and it is trusted all over the world thus
it is demanded more than Mexico peso making it to always have superior value.
Q5) $1= 3 Argentine pesos
1 Argentine peso =0.50CAD
$1=3(0.50CAD) =1.50CAD
100,000CAD=$(100,000/1.50) =$6,666.67
International Finance and Trade Fall 2017
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Q6)
a) The demand for British pound will reduce. As a result, loanable interest rate for British
bounds will decrease because the demand curve will shift to the left.
b)
R
S
R1
R2
D2
D1
BRITISH POUND(Q)
Q2
Q1
Q7)
a) 0.7 x 7 million =$4.9 million
b) 4.9 million/1.25=3.92 million euros.
c) interest income= 4.9 million – (0.67 x7) million=0.21milliom
d)interest expense =3.92million euros x 0.07 X1=0.2744 million euros
=$(0.2744/1.30) million= $0.2111 million
Q8)
a) Decrease in demand for Japanese yen because Japanese traders will buy more dollars
to import from USA decreasing demand for Japanese yen.
International Finance and Trade Fall 2017
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EXCHANGE RATE($/YEN)
b)
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R1
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D2
D1
QUANTITY
Q
Q9)
a) Increase in demand for euros. Dollars will be readily available thus consumers will
demand more euros. EXCHANGE RATE($/euro)
b)
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R2
R1
D2
D1
QUANTITY
Q1
Q2
Q10)
a) Increase in demand for US dollars. Due to reduced confidence in the euro, consumers
will opt to storing their money in terms of dollars instead of euros.
International Finance and Trade Fall 2017
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b)
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D1
EUROS(Q)
Q1
Q2
Q11)
a) buy one million dollars forward (borrowing pounds to do so)
b) profit = interest = (5-4) % X 1000,000
= $10,000
Q12) Gain because expiration rate is higher than forwarded exchange rate.
Q13) Profit= (1.12-1.10)1000=$20
Q14) Profit= (1.12-1.10)1500=$30
Q15)
a) I will sell today because the value of yen will decrease in the future.
b) I will purchase an option today because in future more money will be required as the yen will
depreciate.
Q1) rate x 3000=50,000
Spot rate =16.67
$1=16.67CAD
International Finance and Tra...