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Economics - Assignment Example

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Munaf Usmani Academia Research March 02, 2011 Problem 1 Part (a) In order to calculate the exchange rate between the Japanese Yen and the Chinese Yuan, we take the FX rate of the CNY for 2002 and divide it by the FX Rate for JPY. USD/CNY 0.125 USD/JPY 0.0075 JPY/CNY 16.66667 Part (b) From the year 2002 to the year 2003, the US Dollar experienced depreciation against the Mexican Peso, which came to exactly 12.5%…
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Download file to see previous pages... However, these appreciations were very minimal, but the depreciation against the Peso was substantial. Part (d) On a broader scale, depreciation in the US Dollar will make its exports appear cheaper as the country trading with the USA can get more dollars for their respective currency in 2003 as compared to 2002. On the split side, the USA importers will have to pay more dollars to obtain the required Foreign Exchange for their imports, and hence imports will become more costly. In a nut shell, the exports will get a boost and the imports will be hindered by a depreciating US Dollar. However, if we look on an individual scale, the Yen, Yuan and Canadian dollar all depreciated against the US Dollar, and hence USA’s export to these countries might marginally reduce and imports may marginally rise. In Mexico’s case, exports will strongly boost and imports will decline. Problem 2 Part (a) There are two ways an investor can take advantage of this arbitrage. In the first alternative, he can buy Euros in the New York FX Market at a rate of $1.25/Euro and then sell these Euros in the Tokyo FX Market at a rate of $1.27/Euro to make a clean spread of 2 cents on each Euro he sells. ...Download file to see next pagesRead More
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