The Danish Central Bank buys bonds from the Eurozone, e.g. German government bonds. How do the...

The Danish Central Bank buys bonds from the Eurozone, e.g. German government bonds. How do the spot market for Euros, the forward market for Euros, the loanable funds market for Euros, and the loanable funds market for Danish Krones graphically look like? What happens to supply of and demand for these currencies in the foreign exchange market?

Expert Solution

"Danish CB buys bonds in Euros. For this transaction, they have to pay in Euro. Hence, they have to purchase Euro and sell Krone. The demand for Euro increased and supply of Krone decreased. (Assuming this is the only transaction in international currency markets, and large enough to impact the international currency rates). As the demand for Euro increased, the spot markets will show an appreciation for Euro currency with respect to Krone. The forward markets will behave in a more uncertain manner. It is likely to increase as the forward rates are linked to spot rates.
As Danish CB sold Krone, the loanable funds in Krone decreased. As the Danish CB purchased Euro bonds by paying Euro i.e. by supplying Euro, the loanable funds in Euro increased.
All these situations can be shown graphically as follows- "

jeff jeffy answered 2 years ago

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