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Unformatted text preview: 1 Moore School of Business Spring 2012 University of South Carolina IBUS 401 INTERNATIONAL FINANCIAL MANAGEMENT Answers to selected end-of-chapters problems Chapter 6 Government Influence on Exchange Rates Problems assigned: 1, 2, 3, 4, 5, 6, 9, 10, 13, 16 1. Exchange Rate Systems. Under a fixed exchange rate system, the governments attempted to maintain exchange rates within 1% of the initially set value (slightly widening the bands in 1971). Under a freely floating system, government intervention would be non-existent. Under a managed float system, governments will allow exchange rates move according to market forces; however, they will intervene when they believe it is necessary. A freely floating system may help correct balance-of-trade deficits since the currency will adjust according to market forces. Also, countries are more insulated from problems of foreign countries under a freely floating exchange rate system. However, a disadvantage of freely floating exchange rates is that firms have to manage their exposure to exchange rate risk. Also, floating rates still can often have a significant adverse impact on a countrys unemployment or inflation. See Advantages/Disadvantages summary table and examples provided in class. 2. Intervention with Euros. It can not apply intervention on its own because the European Central Bank (ECB) controls the money supply of euros. Belgium is subject to the intervention decisions of the ECB. 3. Direct Intervention. Central banks can use their currency reserves to buy up a specific currency in the foreign exchange market in order to place upward pressure on that currency. Central banks can also attempt to force currency depreciation by flooding the market with that specific currency (selling that currency in the foreign exchange market in exchange for other currencies). (selling that currency in the foreign exchange market in exchange for other currencies)....
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This note was uploaded on 03/20/2012 for the course IBUS 401 taught by Professor Mr.guedhami during the Spring '12 term at South Carolina.
- Spring '12