Chap 3 Problem Sets

# Chap 3 Problem Sets - Problem 3.1 Brussels and New York In...

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Problem 3.1 Brussels and New York Assumptions Values Buy a US dollar in Brussels for (€/\$) 0.8200 Which is equivalent, the reciprocal (\$/€) \$1.2195 Buy a euro in NY for (\$/€) \$1.2200 Which is equivalent, the reciprocal (€/\$) € 0.8197 There is an obvious minor difference between the two currency quotes. In Brussels, one can buy a U.S. dollar for €0.8200. In New York, one can buy a euro for \$1.22. What is the foreign exchange rate between the dollar and the euro?

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Problem 3.2 Mexican Peso Changes Calculation of Percentage Change in Value Values Initial exchange rate (peso/\$) 3.20 New exchange rate (peso/\$) 5.50 Percentage change in peso value -41.82% (beginning rate - ending rate) / (ending rate) In December 1994 the government of Mexico officially changed the value of the Mexican peso from 3.2 pesos per dollar to 5.5 pesos per dollar. What was the percentage change in its value? Was this a depreciation, devaluation, appreciation, or revaluation? Explain. Anytime a government sets or resets the value of its currency, it is a managed or fixed exchange rate. If that is the case, any change in its official value must be either a "revaluation" or "devaluation." In this case, a devaluation. This is evident from the fact that it now takes more pesos per U.S. dollar, so its value is less or devalued. In terms of the percentage change calculation, this is indicated by the negative percentage change.
Problem 3.3 Gold Standard Assumptions Values Price of an ounce of gold in US dollars (\$/oz) \$20.67 Price of an ounce of gold in French francs (FF/oz) 310.00 What is the implied French franc/US dollar exchange rate? 15.00 (French franc price of an ounce / US dollar price of an ounce) …. Or if expressed as \$/FF \$0.0667 Before World War I, \$20.67 was needed to buy one ounce of gold. If, at the same time one ounce of gold could be purchased in France for FF310.00, what was the exchange rate between French francs and U.S. dollars?

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Problem 3.4 Good as Gold Gold Standard Assumptions Values What If Price of an ounce of gold in US dollars (\$/oz) \$20.67 \$38.00 Price of an ounce of gold in British pounds (₤/oz) £4.2474 £4.2474 What is the implied \$/₤ exchange rate? \$4.8665 \$8.9466 (dollar price of an ounce / pound price of an ounce) Under the gold standard, the price of an ounce of gold in U.S. dollars was \$20.67, while the price of that same ounce of gold in British pounds was £ 4.2474. What would the exchange rate between the dollar and the pound be if the U.S. dollar price had been \$38.00 per ounce?
Mexican Peso Spot Rate Assumptions Values Spot rate on Mexican peso (pesos/US\$) 10.7400 Your company buys this amount of pesos 350,000.00 What is the cost in US\$? \$32,588.45 (the peso amount divided by the spot exchange rate) Spot transactions are settled in two business days, so in this case, Wednesday. The spot rate for Mexican pesos is Ps10.74/\$. If your company buys Ps350,000

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## This note was uploaded on 12/06/2011 for the course FIN 536 taught by Professor Staff during the Fall '11 term at S.F. State.

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Chap 3 Problem Sets - Problem 3.1 Brussels and New York In...

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