1) It has been argued that exchange rate can be utilized as the policy tool. Suppose that U.S. government would like to decrease inflation. Which of the given is suitable action given this scenario? Describe your answer.
a) Sell dollars for foreign currency
b) Bbuy dollars with foreign currency
c) Lllower interest rates
d) None of the above
2) Locational Arbitrage. Suppose the following information:
Beal Bank Yardley Bank
Bid price of New Zealand dollar $.401 $.398
Ask price of New Zealand dollar $.404 $.400
This information, is locational arbitrage possible? If so, describe steps involved in locational arbitrage, and find out profit from this arbitrage if you had= $1,000,000 to use. What market forces would happen to eradicate any further possibilities of locational arbitrage?
3) Suppose that interest rate in home country of Currency X is much higher interest rate than U.S. interest rate. According to interest rate parity, forward rate of Currency X: Describe your answer.
a) Must exhibit a discount.
b) Must exhibit a premium.
c) Must be zero (i.e., it should equal its spot rate).
d) B or C.