Microsoft Word - Money, Banking, and Int Finance(scribd).docx

Money, Banking, and International Finance

controls that prevent investors withdrawing from their economies. Consequently, both countries
could impose a fixed exchange rate while the central bank can pursue an independent monetary
policy.

Key Terms

foreign-currency exchange market
hedging
speculation
arbitrage
cross rate
intermarket arbitrage
fixed exchange rate

pegged exchange rate

revaluation

devaluation

capital flight

austerity

Rule of Incompatible Trinity

Chapter Questions

1. United Arab Emirates uses the dirham as its currency. How much does a Pepsi costs in
   dirhams if Pepsi costs $0.75 with an exchange rate $1 = 3 dirhams?


2. Please calculate the cross-rate exchange rate for the convertible mark (KM) and U.S. dollar
   for the following exchange rates:

KM to euros: KM 2 / 1 €

Euros to U.S. dollars: € 0.714 / 1$

3. A trader at Citibank has 500,000 Bosnian convertible marks (KM) and observes the
   following exchange rates:

Citibank: € 1 /2 KM

National Westminster: kuna 100 / € 1

Deutsche Bank kuna: 46 / 1 KM

Please note the kuna is the Croatia's currency. Please calculate the cross rate to determine if
arbitrage exists. If intermarket arbitrage exists, how much profit could the Citibank trader earn?

4. As you examine the demand and supply of U.S. dollars in a market, where does the supply
   of U.S. dollars originate from?


5. Please draw a supply and demand function for Mexican pesos. What would happen to the
   market if the 2008 Financial Crisis causes Americans to reduce their demand for Mexican
   made products?