How can a central bank use direct intervention to change the value of a currency

How can a central bank use direct intervention to change the value of a currency

How can a central bank use direct intervention to change

Subject: Business    / Finance    

Question
Direct Intervention. How can a central bank use direct intervention to change the value of a currency? Explain why a central bank may desire to smooth exchange rate movements of its currency.
ANSWER:

2. Indirect Intervention. How can a central bank use indirect intervention to change the value of a currency?
ANSWER:

3.    Sterilized Intervention. Explain the difference between sterilized and non sterilized intervention.
ANSWER:

4 It has been argued that the exchange rate can be used as a policy tool. Assume that the U.S. government would like to reduce unemployment. Which of the following is an appropriate action given this scenario? Explain your answer.
a.    Weaken the dollar
b.    Strengthen the dollar
c.    Buy dollars with foreign currency in the foreign exchange market
d.    Implement a tight monetary policy

 

ANSWER:

 

5.    It has been argued that the exchange rate can be used as a policy tool. Assume that the U.S. government would like to reduce inflation. Which of the following is an appropriate action given this scenario? Explain your answer.

a.    Ssell dollars for foreign currency
b.    Bbuy dollars with foreign currency
c.    Lllower interest rates
d.    None of the above

ANSWER:

6.    Locational Arbitrage. Assume the following information:

Beal Bank Yardley Bank
Bid price of New Zealand dollar $.401 $.398
Ask price of New Zealand dollar $.404 $.400

Given this information, is locational arbitrage possible? If so, explain the steps involved in locational arbitrage, and compute the profit from this arbitrage if you had $1,000,000 to use. What market forces would occur to eliminate any further possibilities of locational arbitrage?
ANSWER:

7.    Triangular Arbitrage. Assume the following information:

Quoted Price
Value of Canadian dollar in U.S. dollars $0.90
Value of New Zealand dollar in U.S. dollars $0.30
Value of Canadian dollar in New Zealand dollars NZ$3.02
Given this information, is triangular arbitrage possible? If so, explain the steps that would reflect triangular arbitrage, and compute the profit from this strategy if you had $1,000,000 to use. What market forces would occur to eliminate any further possibilities of triangular arbitrage?

ANSWER:

 

 

8.    Covered Interest Arbitrage. Assume the following information:
Quoted Price
Spot rate of Canadian dollar $.80
90 day forward rate of Canadian dollar $.79
90 day Canadian interest rate 4.0%
90 day U.S. interest rate 2.5%
Given this information, what would be the yield (percentage return) to a U.S. investor who used covered interest arbitrage? (Assume the investor invests $1,000,000.) What market forces would occur to eliminate any further possibilities of covered interest arbitrage?
ANSWER:

 

9.    Assume that the interest rate in the home country of Currency X is a much higher interest rate than the U.S. interest rate. According to interest rate parity, the forward rate of Currency X: Explain your answer.

a.    should exhibit a discount.
b.    should exhibit a premium.
c.    should be zero (i.e., it should equal its spot rate).
d.    B or C

ANSWER:

10.    Assume the following information:

U.S. investors have $1,000,000 to invest:
1-year deposit rate offered on U.S. dollars = 12%
1-year deposit rate offered on Singapore dollars = 10%
1-year forward rate of Singapore dollars = $.412
Spot rate of Singapore dollar = $.400

Given this information:
a.    interest rate parity exists and covered interest arbitrage by U.S. investors results in the same yield as investing domestically.
b.    interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.
c.    interest rate parity exists and covered interest arbitrage by U.S. investors’ results in a yield above what is possible domestically.
d.    interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield below what is possible domestically.

 

11.    Comparing Parity Theories. Compare and contrast interest rate parity, purchasing power parity (PPP), and the international Fisher effect (IFE).
ANSWER:

12.    Source of Weak Currencies. Currencies of some Latin American countries, such as Brazil and Venezuela, frequently weaken against most other currencies. Why don’t all U.S.-based MNCs use forward contracts to hedge their future remittances of funds from Latin American countries to the U.S. even if they expect depreciation of the currencies against the dollar?