6. Currency Attack Central bank of country Song vs. a group of currency investors in the foreign exchange market The economy of country song has two state, good or bad, we denote the state of economy as 6. f(6') is the oating exchange rate of country songs currency without any central bank innervation. That is, f0?) is the US dollar value of country songs currency. The name of country song's currency is Jiaozi. Let us denote Jiaozi's symbol as =6 Then, f0?) = $/(for one unit of Jiaozi, what is the equivalent value in terms of US dollar). In the different state of economy, f (6') is different. f0?) is higher in good state of economy than in bad state. 6* is the xed exchange rate of songs currency, J iaozi. e'" :> f (6') regard- less of the state of 6. Global currency investor can choose to attack song's currency (Jiaozi) or not (selling short or refraining). If currency investor attack J iaozi and Central bank of Song(Hubu) abandon J iaozi's xed exchange rate policy, Global currency investor' revenue (or Utility) is e" f(6) t. If Hubu defend, the exchange rate will stay the same, the Global currency investor' revenue is t As long as currency investor choose to refrain, their payoff is 0. The cost of Hubu's defense is 3. Central bank will receive payoff 13/2 as long as the exchange rate does not change. If central bank (hubu) choose to defend, he will receive another o/Z, however, he need to pay the defense cost. In summary, When currency investor choose to refrain, Hubu's payoff is v c if Hubu defends(hold the xed exchange rate);When currency investor choose to refrain, Hubu's payoff is 'v/Z if Hubu gives up the xed exchange rate policy;When currency investor choose to attack, Hubu's payoff is 'u c if Hubu defends(hold the xed exchange rate);When currency investor choose to attack, Hubu's payo is 0 if Hubu gives up the xed exchange rate policy; Note, due to the existence of transaction cost 15, in good economy state, (3* f (6')) 13. Note, iii/2