Question ONE

1. A U.S. firm must make a payment of 1 million yen to a Japanese firm that has sold the U.S. firm sets of Japanese baseball-player trading cards. The U.S. firm begins with a dollar checking account. Explain in detail how this payment would be made, including the use of the spot foreign exchange market and banks in both countries.

Question TWO

2. A British bank has acquired a large number of dollars in its dealings with its clients. How could this bank use the interbank foreign exchange market if it was unwilling to continue holding these dollars?

Question THREE

3. A trader at a U.S. bank believes that the euro will strengthen substantially in exchange-rate value during the next hour. How would the trader use the interbank market to attempt to profit from her belief?

Question FOUR

4. For each of the following, is it part of demand for yen or supply of yen in the foreign exchange market

a. A Japanese firm sells its U.S. government securities to obtain funds to buy real estate in Japan.

b. A U.S. import company pays for glassware purchased from a small Japanese producer.

c. A U.S. farm cooperative receives payment from a Japanese importer of U.S. oranges.

d. A U.S. pension fund uses some incoming contributions to buy equity shares of several Japanese companies through the Tokyo stock exchange.

Question FIVE

5. You have access to the following three spot exchange rates:

$0.01/yen

$0.20/krone

25 yen/krone

You start with dollars and want to end up with dollars.

a. How would you engage in arbitrage to profit from these three rates? What is the profit for each dollar used initially?

b. As a result of this arbitrage, what is the pressure on the cross-rate between yen and krone? What must the value of the cross-rate be to eliminate the opportunity for triangular arbitrage?

Question SIX

6. The spot exchange rate between the dollar and the Swiss franc is a floating, or flexible, rate. What are the effects of each of the following on this exchange rate?

a. There is a large increase in Swiss demand for U.S. exports as U.S. culture becomes more popular in Switzerland.

b. There is a large increase in Swiss demand for investments in U.S. dollar-denominated financial assets because of a Swiss belief that the U.S. economy and political situation are improving markedly.

c. Political uncertainties in Europe lead U.S. investors to shift their financial investments out of Switzerland back to the United States.

d. U.S. demand for products imported from Switzerland falls significantly as bad press reports lead Americans to question the quality of Swiss products.

Question SEVEN

7. Assume instead that the spot exchange rate between the dollar and Swiss franc is a fixed or pegged rate within a narrow band around a central rate. For each change shown in the previous question, assume that just before the change, private (or nonofficial) supply and demand intersected at an equilibrium exchange rate within this narrow band. For each change shown in the previous question, what intervention is necessary by the monetary authorities to defend the fixed rate if the change shifts the intersection of private supply and demand outside the band?

Please answer each with the corresponding number/letter in order with a simple response.