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Read Article and Answer Questions at the bottom Swiss central bank bought another 67.1 billion Sfr in FX in 2016 ZURICH (Reuters) - Switzerland's central
Read Article and Answer Questions at the bottom
Swiss central bank bought another 67.1 billion Sfr in FX in 2016
ZURICH (Reuters) - Switzerland's central bank bought another 67.1 billion Swiss francs (54.17 billion pounds) worth of foreign currencies in 2016, almost a quarter less than the previous year, in its effort to fight the appreciation of the safe-haven franc. "These interventions occurred mainly at times of heightened uncertainty, when the Swiss franc was particularly sought after as a safe investment," the Swiss National Bank said in its annual report published on Thursday. Currency interventions and negative interest rates are the SNB's main tools in its campaign to weaken the franc, which it has consistently described as "significantly overvalued".A strong franc complicates life for Switzerland's exporters by making their products more expensive outside the country. Interventions fell from 86.1 billion francs in 2015. The SNB intervened heavily at the start of 2015, when it abruptly removed its cap on the franc's value against the euro. As a result of the SNB's foreign currency purchases, its balance sheet has ballooned to more than 740 billion francs, larger than the entire Swiss economy, raising concerns it could swing between big profits and losses in the future.To safeguard against such swings, the SNB more than trebled to 4.6 billion francs the funds its sets aside as a cushion. Total provisions for currency reserves rose to 62.8 billion francs at year's end. The SNB is not required to make a profit, with its main mandate to ensure price stability in Switzerland. But a portion of any profit it does make is distributed to the Swiss government and the country's 26 cantons.
Questions: Did the Swiss central bank buy Swiss francs or buy foreign currencies? Did it to push the franc up/stop it from falling, or to push the franc down/stop it from going up? Why did the Swiss central bank want this to happen to the exchange rate? What happened to the central bank's foreign reserves?
Draw a forex supply and demand diagram for the Swiss franc. If the Swiss central bank bought Swiss francs that would mean that the demand (demand = buying) for the franc has increased. If the Swiss central bank sold Swiss francs that would mean that the supply (supply = selling) of francs has increased. Draw a new supply OR demand curve for francs based on which of these things the central bank did. What has happened to the equilibrium price of francs? Is this change in the equilibrium price the same as what the central bank was trying to achieve? (If not, start again!)
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