Instructions: Please read Chapter 10 Introduction to Exchange Rates (p. 338 – 341; 345 – 356; 359 – 368). Type up your answers to the following questions:
- What is the notation used in the textbook to represent dollar’s exchange rate against euro?
- If dollar appreciates against euro from yesterday to today, does this mean the exchange rate gets bigger or smaller using the notation you get from #1? Why?
- If dollar depreciates against euro, will this make American goods more expensive or less expensive to Eurozone buyers? Why?
- How does fixed exchange rate differ from floating exchange rate?
- How does currency union differ from dollarization?
- How does forward exchange rate differ from spot exchange rate?
- Suppose £ represents British pound and ¥ represents Japanese yen. If E¥/£ = 150 in Tokyo while E¥/£ = 155 in London. How would you do arbitrage to make a profit?
- What is the meaning of covered interest parity? How do you use it to determine the forward exchange rate?
- What is the meaning of uncovered interest parity? How do you use it to determine the spot exchange rate?
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