Question $1$

Are the following statements true or false? Provide a short justification for your answer. $($Evaluations are based on your justification.$)$

$(1)$ On a balance of payments table, the current account balance and financial account balance cannot be surplus at the same time.

$(2)$ Depreciation of the domestic currency is a positive shock to the current account balance in the short run and negative shock in the long run.

$(3)$ The existence of bid$-$ask spreads makes it impossible to profit from triangular arbitrage strategies.

$(4)$ A market with higher liquidity usually has smaller bid$-$ask spreads.

$(5)$ If currency X is trading at a premium to currency Y $,$ then X can earn higher interest rate than Y going forward.

Question $2$

For the following multiple$-$choice questions, select all the choices that are correct.

$(1)$ Information about which of the following can potentially be learned from a country's balance of payments accounts?

A$.$ The foreign currency reserve held by the central bank

B$.$ The country's international competitiveness

C$.$ The country's status as a net creditor or debtor

D$.$ The country's openness to trade

$(2)$ A credit entry in a country's balance of payments has a sign and gives rise to an increase in the

a country's currency.

A$.$ negative; demand for

B$.$ negative; supply of

C$.$ positive; demand for

D$.$ positive; supply of

$(3)$ The interest rate will be higher in the United States than in the U$.$K$.$ when the dollar is at a forward that is$,$ when the dollar is expected to against the pound.

A$.$ premium; appreciate

B$.$ discount; depreciate

C$.$ discount; appreciate

D$.$ premium; depreciate

Question $3$

$(1)$ A bank is quoting the following exchange rates against the dollar for the Swiss franc and the Australian dollar:

$SF\frac{r}{\text{\$}}=1\mathrm{.}5964-74$

$A\frac{\text{\$}}{\text{\$}}=1\mathrm{.}7233-43$

Question: An Australian firm asks the bank for an SFr$/$A$ quote. What cross$-$rate would the bank quote? $($Round your answers to $4$ decimal places.$)$

$(2)$ A foreign exchange trader with a U$.$S$.$ bank took a short position of $5,000,000$ when the $\frac{\text{\$}}{}$ exchange rate was $1\mathrm{.}36.$ Subsequently, the exchange rate has changed to $1\mathrm{.}42.$

Question: Is this movement in the exchange rate good from the point of view of the position taken by the trader? By how much has the bank's liability changed because of the change in exchange rate?

Question $4$

Consider the example discussed in class. Suppose $\frac{\text{\$}}{}$ bid$-$ask spread is $$1\mathrm{.}3153-$ $$1\mathrm{.}3158,$ and bid$-$ask spread is $$1\mathrm{.}1228-$ $$1\mathrm{.}1232.$ Now, you have the the spot cross$-$rate quotes for as $.$

$(1)$ Are there any feasible arbitrage opportunities?

$(2)$ If you answer "yes" to $(1),$ give a concrete numerical example of your trading strategy $($i$.$e$.,$ with specific numbers$).$ What are the factors that may affect your ability to realize that profit? If you answer $"$no$"$ to $(1),$ under what conditions do you think the arbitrage opportunity may become available?