Need assistance with the attached work.

Thank you!

Chapter Three Questions: 1. What are the five basic mechanisms for establishing exchange rates? a. How does each mechanism work? b. What costs and benefits are associated with each mechanism? c. Have exchange rate movements under the current system of managed floating been excessive? Explain 6. How did the EMS limit the economic ability of each member nation to set its interest rate to be different from Germany's? 9. In 1996, Britain's Chancellor of the Exchequer Kenneth Clarke called for a national debate on whether Britain should join the European Monetary Union (EMU). Discuss the pros and cons for Britain of joining EMU. Chapter Three Problems: 1. During the currency crisis of September 1992, the Bank of England borrowed DM 33 billion from the Bundesbank when a pound was worth DM 2.78, or $1.912. It sold these DM in the foreign exchange market for pounds in a futile attempt to prevent a devaluation of the pound. It repaid these DM at the post crisis rate of DM 2.50:1. By then, the dollar: pound exchange rate was $1.782:1. a. By what percentage had the pound sterling devalued in the interim against the Deutsche mark? Against the dollar? b. What was the cost of intervention to the Bank of England in pounds? In dollars? 2. Suppose the central rates within the ERM for the French franc and DM are FF 6.90403:ECU 1 and DM 2.05853:ECU 1, respectively. a. What is the crossexchange rate between the franc and the mark? b. Under the former 2.25% margin on either side of the central rate, what were the approximate upper and lower intervention limits for France and Germany? c. Under the new 15% margin on either side of the central rate, what are the current approximate upper and lower intervention limits for France and Germany? 5. By some estimates, $185 billion to $260 billion in currency is held outside the United States. a. What is the value to the United States of the seigniorage associated with these overseas dollars? Assume that dollar interest rates are about 6%. b. Who in the United States realizes this seigniorage? Chapter Four Questions: 1. a. What is purchasing power parity (PPP)? b. What are some reasons for deviations from PPP? c. Under what circumstances can PPP be applied? 3. Suppose the dollar/rupiah rate is fixed but Indonesian prices are rising faster than U.S. prices. Is the Indonesian rupiah appreciating or depreciating in real terms? 6. The interest rate in England is 12%; in Switzerland it is 5%. What are the possible reasons for this interest rate differential? What is the most likely reason? 8. Over the period 1982-1988, a number of countries (e.g., Pakistan, Hungary, Venezuela) had a small or negative interest rate differential and a large average annual depreciation against the dollar. How would you explain these data? Can you reconcile these data with the international Fisher effect? 11. In early 1990, Japanese and German interest rates rose while U.S. rates fell. At the same time, the yen and DM fell against the U.S. dollar. What might explain the divergent trends in interest rates? 12. In late December 1990, 1year German treasury bills yielded 9.1%, whereas 1year U.S. treasury bills yielded 6.9%. At the same time, the inflation rate during 2006 was 6.3% in the United States, double the German rate of 3.1%. a. Are these inflation and interest rates consistent with the Fisher effect? b. What might explain this difference in interest rates between the United States and German Chapter Four Problems: 1. From base price levels of 100 in 2000, Japanese and U.S. price levels in 2003 stood at 98 and 109, respectively. a. If the 2000 $: exchange rate was $0.00928, what should be the exchange rate in 2006? b. In fact, the exchange rate in 2006 was 1 $0.00860. What might account for the discrepancy? (Price levels were measured using the consumer price index.) 2. Two countries, the United States and England, pro duce only one good, wheat. Suppose the price of wheat is $3.25 in the United States and is 1.35 in England. a. According to the law of one price, what should the $: spot exchange rate be? b. Suppose the price of wheat over the next year is expected to rise to $3.50 in the United States and to 1.60 in England. What should the 1year $: forward rate be? c. If the U.S. government imposes a tariff of $0.50 per bushel on wheat imported from England, what is the maximum possible change in the spot exchange rate that could occur? 4. Suppose the shortterm interest rate in France is 3.7%, and forecast French inflation is 1.8%. At the same time, the shortterm German interest rate is 2.6% and forecast inflation in Germany is 1.6%. a. Based on these figures, what are the real interest rates in France and Germany? b. To what would you attribute any discrepancy in real rates between France and Germany? 6. Suppose that in Japan the interest rate is 8% and inflation is expected to be 3%. Meanwhile, the expected inflation rate in France is 12% and the British interest rate is 14%. To the nearest whole number, what is the best estimate of the 1year forward exchange premium (discount) at which the pound will be selling relative to the euro? 8. During 1995, the Mexican peso exchange rate rose from Mex$5.33/U.S.$ to Mex$7.64/U.S.$. At the same time, U.S. inflation was approximately 3% in contrast to Mexican inflation of about 48.7%. a. By how much did the nominal value of the peso change during 1995? b. By how much did the real value of the peso change over this period? 10. Assume that the interest rate is 16% on pounds ster ling and 7% on euros. At the same time, inflation is running at an annual rate of 3% in Germany and 9% in England. a. If the euro is selling at a 1year forward premium of 10% against the pound, is there an arbitrage opportunity? Explain. b. What is the real interest rate in Germany? In England? c. Suppose that during the year the exchange rate changes from 1.8:l to 1.77:l. What are the real costs to a German company of borrowing pounds? Contrast this cost to its real cost of borrowing euros. d. What are the real costs to a British firm of borrowing euros? Contrast this cost to its real cost of borrowing pounds. 14. Here are some prices in markets: Spot rate $1.34: Forward rate (1 year) $ 1.36: Interest rate () 3.5% per year Interest rate ($) 4.75% per year a. Assuming no transaction costs or taxes exist, do covered arbitrage profits exist in this situation? Describe the flows. b. Suppose now that transaction costs in the foreign exchange market equal 0.25% per transaction. Do unexploited covered arbitrage profit opportunities still exist? c. Suppose no transaction costs exist. Let the capital gains tax on currency profits equal 25% and the ordinary income tax on interest income equal 50%. In this situation, do covered arbitrage profits exist? How large are they? Describe the transactions required to exploit these profits