1. What are the main component sub-accounts of the current account in the balance of payments (BoP)? Give and explain one debit and one credit example for each component sub-account for the United States.
2. Use the following spot and forward bid-ask rates for the JPY/USD exchange rate to answer the following questions:
a. Are the rates quoted in American or European terms?
b. What is the mid-rate for each maturity?
c. Is the JPY is trading forward at a premium or discount?
d. What is the annual forward premium or discount for all maturities?
e. Which maturities have the smallest and largest forward premium or discount?
f. What do these rates indicate about the market?s expectations for future JPY/USD rates?
Period JPY/USD Bid Rate JPY/USDAsk Rate Spot
114.23 114.27 1 month 113.82 113.87 2 months 113.49 113.52 3 months 113.05 113.11 6 months 112.05 112.11 12 months 110.20 110.27 24 months 106.83 106.98
3. The following exchange rates are available to you to buy or sell. Mt. Fuji Bank JPY120.00/USD Mt. Rushmore Bank CHF1.6000/USD Mt. Blanc Bank JPY80.00/CHF Assume you have an initial CHF10,000,000. Can you make a profit via triangular arbitrage? If so, how the steps and calculate the amount of profit in Swiss francs (CHF).
4. A corporate treasury with operation in New York simultaneously calls Citibank in New York and Barclays in London, where it receives the following quotes at the same time: Citibank NYC Barclays London USD1.3650-70/EUR USD1.3649-60/EUR Using USD1million or its EUR equivalent and ignoring transaction costs, show how the corporate treasury could make geographic arbitrage profit with the two different exchange rate quotes.
5. Calculate the forward points given by the spot rate of USD1.5500/GBP and the six month forward rate of USD1.5600/GBP. Is the GBP trading forward at a premium or discount relative to the USD?
6. What are the advantages and disadvantages of fixed exchange rates? Which would you prefer for the USD and why?
7. On January 4, 1999, 11 of the 15 European Union (EU) member states initiated the Economic and Monetary Union (EMU) that established a single currency called the euro (EUR) that replaced the individual currencies of these member states.
Subsequently, the EU has grown to 28 members with 18 now using the euro as their currency.
Describe three of the main ways that the euro affects the members of the EMU.