ECON3410.Ch14HW

# 5 with s indicate the amount of pound reserves that

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the United States wanted to maintain a fixed exchange rate of R = 1.5 with S* £ , indicate the amount of pound reserves that the U.S. central bank would gain or lose per day. Answer: a.) See graph for S* £ b.) The equilibrium exchange rate for S* £ can be found at Point C on the graph. This is 60 million £ per day. It’s kind of hidden by the line, but it’s there.

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Chapter 14 HW c.) If the United States wanted to maintain a fixed exchange rate of R = 1.5 with S* £ , the amount of pound reserves would gain/lose 50 million £ per day. 3. Assume the following exchange rates: \$2 = £1 in New York ¥410 = £1 in London ¥200 = \$1 in Tokyo Indicate how profitable triangular, or three-point, arbitrage can take place. Answer: A three-point arbitrage operates in the same way as a two-point arbitrage to ensure consistent indirect exchange rates between the three currencies in three monetary centers. Profitable arbitrage takes place by taking \$2 and exchanging it for £ 1. Then, take the £ 1 and exchange it for ¥410. If you do the exchange in this manner, you will get ¥10 more than if you went straight from \$2 to ¥. Had you done it this way, you would have only gotten ¥400 in the exchange.
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