ANSWER: Initial amount borrowed= 1,000,000 pounds Dollars received when the pounds are converted to dollars = 1,000,000 x $1.70 = $1,700,000 Total dollar amount earned at the end of 1 year = $1,700,000 x 1.05 = $1,785,000 Initial amount borrowed = 1,000,000 pounds 2
Expected amount of dollars needed to repay the loan = 1,050,000 x $1.68 =$1,764,000 8.Direct Intervention. How can a central bank use direct interventionto increase the value of their home currency? Also, explain why a central bank may desire to smooth exchange rate movements of its currency. Hint! Explain this type of intervention. 4 Marks 9.Indirect Intervention. How can a central bank use indirect intervention to increase the value of is home currency? Hint! Explain this type of intervention. 3 Marks 10. Intervention Effects on Corporate Performance . Assume you have a subsidiary in Australia. The subsidiary sells mobile homes to local consumers in Australia, who buy the homes using mostly borrowed funds from local banks. Your subsidiary purchases all of its materials from Hong Kong. The Hong Kong dollar is tied to the U.S. dollar. Your subsidiary borrowed funds from the U.S. parent, and must pay the parent US$200,000 in interest each month. Australia has just lowered its interest rate in order to boost domestic consumption, and the value of its currency falls (Australian dollar, A$). In each case below state whether these actions would increase , decrease , or have no effect on the following: (Also, briefly explain why in each answer.) a. The volume of your subsidiary’s sales in Australia (measured in A$) 4 Marks b. The cost to your subsidiary of purchasing materials (measured in A$) 4 Marks c. The cost to your subsidiary of making the interest payments to the U.S. parent (measured in A$).
- Summer '19
- Finance, Foreign exchange market, United States dollar