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Dollars per foreign currency basket answer the trade

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dollars per foreign currency basket). Answer: The trade-weighted percentage change in the exchange rate is: % Δ E = 0.36(% Δ E $/C$ ) + 0.28(% Δ E $/pesos ) + 0.20(% Δ E $/yuan ) +0.16(% Δ E $/¥ ) % Δ E = 0.36(4.53%) + 0.28(4.23%) + 0.20(0.61%) + 0.16(6.67%) = 4.01% c. Based on your answer to (b), what happened to the value of the U.S. dollar against this basket between 2009 and 2010? How does this compare with the change in the value of the U.S. dollar relative to the Mexican peso? Explain your answer. Answer: The dollar depreciated by 4.01% against the basket of currencies. Vis- à-vis the peso, the dollar depreciated by 4.23%. 3. Go to the Web site for Federal Reserve Economic Data (FRED): http://research. stlouisfed.org/fred2/. Locate the monthly exchange rate data for the following: S-6 Solutions Chapter 2 Introduction to Exchange Rates & the Foreign Exchange Market Country (currency) Share of trade $ per FX in 2009 Dollar per FX in 2010 Canada (dollar) 36% 0.9225 0.9643 Mexico (peso) 28% 0.0756 0.0788 China (yuan) 20% 0.1464 0.1473 Japan (yen) 16% 0.0105 0.0112
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a. Canada (dollar), 1980–2009 b. China (yuan), 1999–2005 and 2005–2009 c. Mexico (peso), 1993–1995 and 1995–2009 d. Thailand (baht), 1986–1997 and 1997–2009 b. Venezuela (bolivar), 2003–2009 Look at the graphs and make a judgment as to whether each currency was fixed (peg or band), crawling (peg or band), or floating relative to the U.S. dollar during each time frame given. a. Canada (dollar), 1980–2009 Answer: Floating exchange rate b. China (yuan), 1999–2005 and 2005–2009 Answer: 1999–2005: Fixed exchange rate. 2005–2009: Gradual appreciation vis- à-vis the dollar. c. Mexico (peso), 1993–1995 and 1995–2006 Answer: 1993–1995: crawl; 1995–2006: floating (with some evidence of a man- aged float) d. Thailand (baht), 1986–1997 and 1997–2006 Answer: 1986–1997: fixed exchange rate; 1997–2006: floating e. Venezuela (bolivar), 2003–2006 Answer: Fixed exchange rate (with occasional adjustments) 4. Describe the different ways in which the government may intervene in the foreign exchange market. Why does the government have the ability to intervene in this way whereas private actors do not? Answer: The government may participate in the forex market in a number of ways: capital controls, official market (with fixed rates), and intervention. The government has the ability to intervene in a way that private actors do not because (1) it can im- pose regulations on the foreign exchange market, and (2) it can implement large-scale transactions that influence exchange rates. 5. Suppose quotes for the dollar–euro exchange rate, E $/ , are as follows: in New York, $1.50 per euro; and in Tokyo, $1.55 per euro. Describe how investors use arbitrage to take advantage of the difference in exchange rates. Explain how this process will af- fect the dollar price of the euro in New York and Tokyo. Answer: Investors will buy euros in New York at a price of $1.50 each because this is relatively cheaper than the price in Tokyo. They will then sell these euros in Tokyo at a price of $1.55, earning a $0.05 profit on each euro. With the influx of buyers in New York, the price of euros in New York will increase. With the influx of traders selling euros in Toyko, the price of euros in Tokyo will decrease. This price adjustment continues until the exchange rates are equal in both markets.
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