assignment4c - AnswerstoquestionsWeek4 10.1Assume that you...

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Answers to questions – Week 4 10.1 –  Assume that you are back in a system of fixed exchange rates and that you own a lot of Mexican pesos. A rumor starts circulating that Mexico will soon devalue the peso. What will you do? Why? I would immediately trade my peso investment for another currency such as U.S. dollars. Because investment tends to trade on perception and future value, the chances are that others will start to sell their investments as well. So I would try to be early and reduce my investment in the peso. The panic of selling pesos would deplete the reserves the Mexican government would have of other currency which would devalue the peso even if the rumor was untrue. If the reserves dropped to low, Mexico would have to borrow another currency such as dollars to keep their economy afloat which would raise the value of the U.S. dollar further. Then if the rumor turns out to be untrue I would buy pesos before they started to rise in value again. 10.4 –  Why do expected movements in foreign exchange rates influence the investment decisions of global investors? Investors compare the expected return of domestic investment versus foreign investment. When
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This note was uploaded on 09/07/2011 for the course ECON ECO 201 taught by Professor Unknown during the Spring '09 term at New York Institute of Technology-Westbury.

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assignment4c - AnswerstoquestionsWeek4 10.1Assume that you...

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