- Instructions: Please read Chapter 10 Introduction to Exchange Rates (p. 338 – 341; 345 – 356; 359 – 368). Type up your answers to the following questions:
- What is the notation used in the textbook to represent dollar’s exchange rate against euro?
- If dollar appreciates against euro from yesterday to today, does this mean the exchange rate gets bigger or smaller using the notation you get from #1? Why?
If dollar depreciates against euro, will this make American goods more expensive or less expensive to Eurozone buyers? Why?
How does fixed exchange rate differ from floating exchange rate?
How does currency union differ from dollarization?
- How does forward exchange rate differ from spot exchange rate?
- Suppose £ represents British pound and ¥ represents Japanese yen. If E¥/£ = 150 in Tokyo while E¥/£ = 155 in London. How would you do arbitrage to make a profit?
- What is the meaning of covered interest parity? How do you use it to determine the forward exchange rate?
- What is the meaning of uncovered interest parity? How do you use it to determine the spot exchange rate?
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