Question

QUESTION 17

1. Let a flexible exchange rate system. Assume a current account deficit of $100 billion. Then the capital account balance must be

a.

None of the answers is correct

b.

a surplus of $100 billion.

c.

a deficit of $100 billion.

d.

a surplus of something more than $100 million.

QUESTION 18

1. Suppose the following direct quotes are received for spot and 1‑month French Francs in New York: 0.1260‑68, 4‑6. Then the outright 30‑day forward quote for the French is:

a.

.1254‑64

b.

.1264‑74

c.

.1266‑72

d.

.1256‑62

QUESTION 19

1. Suppose annual inflation rates in the U.S. and Mexico are expected to be 6.5% and 75%, respectively, over the next several years. If the current spot rate for the Mexican peso is $0.05, then the best estimate of the peso's spot value in 3 years is

a.

$.00276

b.

$.01190

c.

$0.0113

d.

$.00321

QUESTION 20

1. The U.S. has imported more than it has exported every year for the last couple of decades. The persistent American trade deficits have been possible because the US has had a persistent surplus in the capital account.

True

False

Answer 1

Answer -17) For a flexible flow, the deficit in one account should be balanced by the surplus in another account.

So, as per data provided in the question, when there is a$100 billion current account deficit then it should be balanced by $100 billion capital account surplus.

Answer -18) When the spot rates are quoted with pips the forward rate can be calculated as below:

Bid Rate = Spot Bid rate + spread

= 0.1260+ 4/10000

= 0.1264

Ask rate = Spot Ask rate + spread

= 0.1268 + 6/10000

= 0.1274

Option B is correct 0.1264-74

Answer - 19) The future spot rate can be calculated with the help of the uncovered interest rate parity method.

The difference in interest rate between the two currencies should offset the exchange rate difference between the two currencies.

So, the future spot rate = current spot rate * (1+Interest rate in price currency)^years

(1+Interest rate in base currency)^years

= $/ peso 0.05 * (1.065) ^3

(1.75)^3

= $/ peso 0.01129 ~ option c $/peso 0.0113

Answer -20) True, it should be to balance the value of the currency of the country.