Assignment 1
Assignment# 3 by Nedim Halilagic
Chapter 6
14. Freely Floating Exchange Rates. Should the governments of Asian countries allow their currencies to float freely? What would be the advantages of letting their currencies float freely? What would be the disadvantages?
ANS: Given that Asian countries are rising economies and that floating exchange rate systems allows currency values to reflect a nation’s economic fundamentals gradually and efficiently, I would say that they should allow their currencies to float freely. Advantages of freely floating exchange rate system are insulation form the inflation of other countries and from unemployment problems in other countries. However, freely floating exchange rate system can adversely affect a country that has high unemployment.
Chapter 7
2. Locational Arbitrage. Assume the following information:
Beal Bank Yardley Bank Bid price of New Zealand dollar $.401 $.398 Ask price of New Zealand dollar $.404 $.400
Given this information, is locational arbitrage possible? If so, explain the steps involved in locational arbitrage, and compute the profit from this arbitrage if you had $1,000,000 to use. What market forces would occur to eliminate any further possibilities of locational arbitrage? ANS: Yes. One could purchase New Zealand dollars at Yardley Bank for $.40 and sell them to Beal Bank for $.401. With $1 million available, 2.5 million New Zealand dollars could be purchased at Yardley Bank. These New Zealand dollars could then be sold to Beal Bank for $1,002,500, thereby gener¬ating a profit of $2,500.
The large demand for New Zealand dollars at Yardley Bank will force this bank 's ask price on New Zealand dollars to increase. The large sales of New Zealand dollars to Beal Bank will force its bid price down. Once the ask price of Yardley Bank is no longer less than the bid price of Beal Bank, locational arbitrage will no longer be beneficial.
4. Triangular Arbitrage.
Chapter 6
14. Freely Floating Exchange Rates. Should the governments of Asian countries allow their currencies to float freely? What would be the advantages of letting their currencies float freely? What would be the disadvantages?
ANS: Given that Asian countries are rising economies and that floating exchange rate systems allows currency values to reflect a nation’s economic fundamentals gradually and efficiently, I would say that they should allow their currencies to float freely. Advantages of freely floating exchange rate system are insulation form the inflation of other countries and from unemployment problems in other countries. However, freely floating exchange rate system can adversely affect a country that has high unemployment.
Chapter 7
2. Locational Arbitrage. Assume the following information:
Beal Bank Yardley Bank Bid price of New Zealand dollar $.401 $.398 Ask price of New Zealand dollar $.404 $.400
Given this information, is locational arbitrage possible? If so, explain the steps involved in locational arbitrage, and compute the profit from this arbitrage if you had $1,000,000 to use. What market forces would occur to eliminate any further possibilities of locational arbitrage? ANS: Yes. One could purchase New Zealand dollars at Yardley Bank for $.40 and sell them to Beal Bank for $.401. With $1 million available, 2.5 million New Zealand dollars could be purchased at Yardley Bank. These New Zealand dollars could then be sold to Beal Bank for $1,002,500, thereby gener¬ating a profit of $2,500.
The large demand for New Zealand dollars at Yardley Bank will force this bank 's ask price on New Zealand dollars to increase. The large sales of New Zealand dollars to Beal Bank will force its bid price down. Once the ask price of Yardley Bank is no longer less than the bid price of Beal Bank, locational arbitrage will no longer be beneficial.
4. Triangular Arbitrage.