Show that if two currencies i andj independently maintain their exchange rate within a band of fluctuations defmed as ± 1 % around a par value vis-a-vis the U. S. dollar, their currencies i and j will automatically maintain their crossexchange rate within a band of fluctuations ±2 % around their cross-par value.

Hint: Cross-exchange rate S;,it) is simply defined as ~,/t)/ ~,; (t). Similarly, a cross par value is defmed as

Transcribed Image Text:

= [S(0)] PAR [S(0)]PAR [SS,(0)]PAR