NAME: PHAM HONG HANH - HALIE
SID: 10913802
1. Percentage Depreciation. Assume the spot rate of the British pound is $1.73. The expected
spot rate one year from now is assumed to be $1.66. What percentage depreciation does this
reflect?
Depreciation percentage = ((Current rate - Expected future rate Change in spot rate)
/ Current spot rate))* 100%
Depreciation percentage = (($1.73 - $1.66)/ $1.73) * 100%
Depreciation percentage ≈ 4.05%
2. Inflation Effects on Exchange Rates. Assume that the U.S. inflation rate becomes high
relative to Canadian inflation. Other things being equal, how should this affect the (a) the U.S.
demand for Canadian dollars, (b) the supply of Canadian dollars for sale, and (c) the equilibrium
value of the Canadian dollar?
(a) U.S. Demand for Canadian Dollars:
Decrease: A higher U.S. inflation rate erodes the purchasing power of U.S. dollars. This means
U.S. goods and services become relatively more expensive compared to Canadian goods and
services. As a result, U.S. imports from Canada become cheaper, potentially increasing the U.S.
demand for Canadian dollars (to buy those cheaper goods).
(b) Supply of Canadian Dollars for Sale:
Decrease: Canadian exporters will receive U.S. dollars in exchange for their goods. With higher
U.S. inflation, those U.S. dollars buy less in the U.S. This might incentivize Canadian exporters
to hold onto their U.S. dollars or sell less to the U.S., reducing the overall supply of Canadian
dollars available for sale.
(c) Equilibrium Value of the Canadian Dollar:
Appreciation: Assuming the decrease in U.S. demand for Canadian dollars is outweighed by the
decrease in supply (due to the incentive for Canadians to hold onto U.S. dollars), the Canadian
dollar would likely appreciate in value relative to the U.S. dollar.
4. Income Effects on Exchange Rates. Assume that the U.S. income level rises at a much
higher rate than does the Canadian income level. Other things being equal, how should this
affect the (a) the U.S. demand for Canadian dollars, (b) the supply of Canadian dollars for sale,
and (c) the equilibrium value of the Canadian dollar?
(a) U.S. Demand for Canadian Dollars:
Increase: A higher U.S. income level generally leads to increased consumption. With U.S. goods
and services remaining constant (other things being equal), consumers may look for cheaper
alternatives abroad. This could increase the U.S. demand for Canadian goods and services,
leading to a higher demand for Canadian dollars (to buy those goods).
(b) Supply of Canadian Dollars for Sale:
No significant change (assumed): In this scenario, we assume the Canadian income level doesn't
rise much. Therefore, there's no significant incentive for Canadians to change their spending
habits or sell more goods and services abroad. The supply of Canadian dollars for sale might
remain relatively stable.
(c) Equilibrium Value of the Canadian Dollar:
Appreciation: Assuming the increase in U.S. demand for Canadian dollars outweighs the stable
supply, the Canadian dollar would likely appreciate in value relative to the U.S. dollar.
21. Speculation
Exchange Rate Gain: If the SGD depreciates to $0.42 as expected, Diamond Bank will gain from
selling the USD back at the higher exchange rate.
Profit from Exchange Rate (per USD): $0.43 (initial rate) - $0.42 (expected future rate) = $0.01
per USD
Interest Rate Differential: Diamond Bank can potentially benefit from the difference in
borrowing and lending rates between SGD and USD.
Interest Rate Gain (for borrowing SGD): Borrowing rate (USD) - Borrowing rate (SGD) = 7.2%
- 24.0% = -16.8% (negative since borrowing SGD incurs a cost)
Interest Rate Gain (for lending USD): Lending rate (USD) - Borrowing rate (USD) = 7.0% 7.2% = -0.2% (negative since borrowing USD also incurs a cost)
27. Volatility of Exchange Rate Movements.
Mean Monthly Rate = (0.4602 + 0.4709 + 0.4888 + 0.4406 + 0.4260) / 5
Mean Monthly Rate = 0.4573
Squared Deviations from the Mean for Each Month:
May: (0.4602 - 0.4573) ^ 2 ≈ 0.000729
June: (0.4709 - 0.4573) ^ 2 ≈ 0.017424
July: (0.4888 - 0.4573) ^ 2 ≈ 0.099049
August: (0.4406 - 0.4573) ^ 2 ≈ 0.027025
September: (0.4260 - 0.4573) ^ 2 ≈ 0.096049
Variance = [(0.000729) + (0.017424) + (0.099049) + (0.027025) + (0.096049)] / (5 - 1)
Variance = 0.240276 / 4
Variance ≈ 0.060069
Standard Deviation = √(0.060069)
Standard Deviation ≈ 0.2450