(d) WMC decided to borrow in a basket of currencies rather than exclusively in US dollars or Australian dollars. What are they trying to accomplish? What are the advantages and disadvantages of this course off action? (e) Bonus problem. Define economic exposure. How would you go about hedging WMC's economic exposure? What do you think of WMC's decision not to hedge its economic exposure? 6. Exchange-Rate Regimes. Scandinavian countries have followed very different paths in BO+20 response to the introduction of the Euro (EUR). Finland decided to join the common currency, Sweden adopted a free oating regime for the Krona (SEK), and Denmark pegged its currency, the Danish Krone (DKK), to the Euro whereas Norway and Iceland, who are only associated with the EU, retain full independence in monetary and economic affairs. As a result, the fortunes of the Danish Krone and Swedish Krona have sharply diverged in recent times. The Financial Times explains: "The humble Swedish krona is offering a neat reminder that relationships in financial markets are not static. The currency is hardly one of the world's most heavily traded, accounting for only about 2 per cent of global ows. But it has played a number of roles. In a period around 2011, the krona's direction was largely determined by global sentiment in a positive direction: when markets were broadly upbeat, Sweden's small, open economy meant that the currency climbed. Mindful of that relatively recent past, some observers are, therefore, surprised to note that the currency has been clobbered of late, despite a pick-up in global stocks. Notably, the krona fell 2 per cent in January against the neighbouring euro its main counterpart 7 while the S&P 500 regained its mojo after the year-end slump and jumped almost 8 per cent. Carl Hammer, head of macro strategy at Swedish bank SEB in Stockholm, argues that this should be no surprise. " Everyone is getting it wrong as usual," he said. In fact, the krona has reasserted a strong negative relationship with global sentiment. Bad news for broader markets is good news for the krona, and vice versa, he said, much as it is for the yen and other "haven" currencies. The Swedish currency is clearly abnormally weak; typically the euro trades above SKrlO only in times of dire market crisis. The rate has now been above that point for a year. It has fallen further this week, cementing its position as the world's worst-performing leading currency this year, after the latest Swedish ination figures proved far milder than expected. The central bank has taken note, scrapping its threat to intervene in the market and weaken the currency after three years. The explanation is simple: Swedish interest rates are stuck in the freezer. They rose in December but are still a quarter of a point below zero. That, said Mr Hammer, was a gift to hedge funds and computer-driven trading strategies that hunt for currencies linked to low rates and sell them in favour of higher-yielding assets elsewhere when market conditions are benign. Local Swedish investors are also avid consumers of overseas assets when they are feeling ush. When they suffer jolts of nerves, those overseas investments come home, boosting the krona. This is unlikely to change unless the central bank brings interest rates out of the cold and back above zero. Until then, it is not too hard to imagine policymakers concern switching to the risk of a disruptive decline in the currency." (Katie Martin, "Tail Risk," FI' February 20, 2019) (a) Define pegged and oating exchange-rate regimes, respectively. What regime do the DKK and SEK respectively follow
