14.
What is the difference between Eurocurrencies on
the one hand and Eurobonds and Euronotes on the
other?
P R O B L E M S
1.
From the following figure, determine
(a)
the equilibrium exchange rate between the
dollar and the pound sterling and the equilibrium
quantity of pounds with supply curve S
£
and S
£
under a flexible exchange rate system.
(b)
If the United States wanted to maintain the
exchange rate at $3
= £1 with supply curve S
£
,
how much pound reserves would the U.S. central
bank gain or lose per day?
2.
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(a)
Redraw demand curve for pounds D
£
and
supply curve of pounds S
£
as in the figure of
Problem 1 and draw on it another supply curve
for pounds (label it S
∗
£
) that intersects D
£
at $1
= £1 (label the point of intersection C).
B
A
S'
D
3
2
1
0
20
40
60
Million /Day
R = $/
S
(b)
Assuming a flexible exchange rate system,
determine the equilibrium exchange rate and equi-
librium quantity of pounds with S
∗
£
.
(c)
If the United States wanted to maintain a
fixed exchange rate of R
= 1.5 with S
∗
£
, indicate
the amount of pound reserves that the U.S. central
bank would gain or lose per day.
3.
Assume the following exchange rates:
$2
= £1 in New York
¥410
= £1 in London
¥200
= $1 in Tokyo
Indicate how profitable triangular, or three-point,
arbitrage can take place.
4.
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