International Economics

Suppose you have been appointed as a banker/portfolio holder in an international bank. When you run your portfolio, apart from government securities, there are substantial amounts of foreign exchange reserves available. You are expecting to make good returns in the short run from holding foreign exchange reserves. In the meantime, you see that even though it recovered faster from the COVID-19 pandemic, the Croatian economy is experiencing a high trade deficit and very high inflation compared to its trading partners, including Greece, Germany, Spain and Holland. The Croatian central bank aimed to defend a fixed exchange rate between the Croatian Kuna and Euro (common currency in EU) in the last couple years. The aim of Croatia is to enter the European monetary union in the following 5 years. According to your economic research and analysis you have come up with a conclusion that the fixed exchange rate between the Croatian Kuna and Euro is not sustainable in the near future. Explain how you will make a profit in the short run. Please ensure you use the necessary terminology in your discussion.