Economics (Irwin Economics)
Economics (Irwin Economics)
21st Edition
ISBN: 9781259723223
Author: Campbell R. McConnell, Stanley L. Brue, Sean Masaki Flynn Dr.
Publisher: McGraw-Hill Education
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Chapter 41.A, Problem 1ADQ
To determine

Comparison of Bretton woods system with the gold standard.

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The current exchange rate is £1.00 = $2.00. Compute the correct balances in Bank A's correspondent account(s) with Bank B if a currency trader employed at Bank A buys £45,000 from a currency trader at Bank B for $90,000 using its correspondent relationship with Bank B: O a. Bank A's pound-denominated account at B will rise by £45,000. O b. Bank B's dollar-denominated account at A will fall by $90,000. O c. Bank B's pound-denominated account at A will rise by £45,000. O d. Bank A's dollar-denominated account at B will rise by $90,000.
7. Previously metals are used as trading purposes. Both gold and silver are used as international means of payment and the exchange rates among currencies are determined by either their gold or silver contents. Suppose that the dollar was pegged to gold at S20 per ounce, the Japanese yen is pegged to gold at 120,000 yen per ounce and to silver at 8,000 yen per ounce of silver, and the Canadian dollar is pegged to silver at S$5 per ounce of silver. What would the exchange rate between the U.S. dollar and Canadian dollar be under this system?
2 Suppose that the current spot exchange rate is €0.8250/$ and the three-month forward exchange rate is €0.8132/5. The three-month interest rate is 5.80 percent per annum in the United States and 5.40 percent per annum in France. Assume that you can borrow up to $1,000,000 or €825,000 Show how to realize a certain profit via covered interest arbitrage, assuming that you want to realize profit in terms of U.S. dollars. Also determine the size of your arbitrage profit.
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