Essay Questions 55. A retailer in Mexico wants to buy $100 000 worth of Apple computers from the United States. The Mexican retailer has pesos while the seller in the United States wants to be paid in U.S. dollars. Explain how this transaction is completed with particular emphasis on the foreign exchange market and banks in the United States and Mexico. 56. Suppose $1 = 0.85 euros in New York 1 euro = 150 yen in Paris and 1 yen = $0.008 in Tokyo. If you begin by holding $1 how could you profit from these exchange rates? What is your arbitrage profit per dollar initially traded? Identify the forces at work that will make the cross exchange rates consistent in currency arbitrage. That is what forces will lead to a situation in which no profitable arbitrage is possible? 57. Explain how the following factors affect the dollar’s exchange rate under a floating exchange rate system: a. Tariffs and quotas placed by the U.S. on all imports into the country. b. Decreased demand by foreign consumers for U.S. exports and increased U.S. demand for imports. c. Rising real interest rates in the United States relative to interest rates in Europe leads to capital inflows. d. Rising U.S. fiscal deficits reduce investor confidence and lead to capital outflows. 58. For each case below state whether the euro has appreciated or depreciated and give an example of an event that could cause the change in the exchange rate. a. The spot rate goes from 450 euros/Mexican peso to 440 euros/Mexican peso. b. The spot rate goes from 0.011 Mexican pesos/euro to 0.006 Mexican pesos/euro. c. The spot rate goes from 1.48 euros/British pound to 1.51 euros/British pound. d. The spot rate goes from 0.73 British pounds/euro to 0.75 British pounds/euro. 59. Provide a description for the following terms: a. Foreign exchange swap b. Arbitrage c. Triangular arbitrage d. Forward exchange rate 60. How does the interbank foreign exchange trading work? What is being traded in the interbank part of the foreign exchange markets? What functions does it serve? .
