Question 2

a. Briefly describe how various economic factors can affect the equilibrium exchange rate of the Japanese yen's value with respect to that of the dollar. (200 words) 20 marks

b. A recent shift in the interest rate differential between the United States and Country A had a large effect on the value of Currency A. However, the same shift in the interest rate differential between the United States and Country B had no effect on the value of Currency Explain why the effects may vary. (100 words) 10 marks

c. Smart Banking Corp. can borrow $5 million at 6 percent annualized. It can use the proceeds to invest in Canadian dollars at 9 percent annualized over a 6-day period. The Canadian dollar is worth $.95 and is expected to be worth $.94 in 6 days. Based on this information, should Smart Banking Corp. borrow U.S. dollars and invest in Canadian dollars? What would be the gain or loss in U.S. dollars? (200 words) 20 marks