Question

In: Finance

Assume that the United States invests in government and corporate securities of Country K. In addition,...

Assume that the United States invests in government and corporate securities of Country K. In addition, residents of Country K invest in the United States. Approximately $8 billion worth of investment transactions occur between these two countries each year. The total dollar value of trade transactions per year is about $12 million. This information is expected to also hold in the future.

Because your firm exports goods to Country K, your job as international cash manager requires you to forecast the value of Country K’s currency (the “krank”) with respect to the dollar. Explain how each of the following conditions will affect the value of the krank, holding other things equal. Then, aggregate all of these impacts to develop an overall forecast of the krank’s movement against the dollar.

       a.   The U.S. inflation has suddenly increased substantially, while Country K’s inflation remains low.

       b.   The U.S. interest rates have increased substantially, while Country K’s interest rates remain low. Investors of both countries    are attracted to high interest rates.

       c.   The U.S. income level increased substantially, while Country K’s income level has remained unchanged.

       d.   The U.S. is expected to impose a small tariff on goods imported from Country K.

       e.   Combine all expected impacts to develop an overall forecast.

Solutions

Expert Solution

a. as the inflation rate in the USA is high the price of the goods and services produced in US will be higher than that of the Foriegn Goods and services so the the foreign goods will be cheaper than the domestic ones hence US's Export will be decrease and the import will going to be increase. so the dollar will depriciate and krank will appreciate

b. as the interest rates are higher in the Us people will more invest in the US and to invest in the Us they will require the dollar that means demand of the dollar will iuncrease while the demand of the Krank will decrease and hence the Dollar will Appreciate and the krank will depriciate

c. if the income level in US is increase that means the purchasing power of the people is increase while the supply of the goods and services is same so people will more tends to import goods from Country K tio fulfil the additional demand and due to that the demand of the karnk will increase while the demand of the dollar will remains the stable hence the dollar will depriciate and the krank will appreciate.

d. as US impose the tarrif the demand of the Country K's goods will decrease beacause due to tariff the goods imported from the country K will become costier than the US's goods so the demand of the Us goods will increase and the Country k's goods will decrease hence the demand of krank will decrease which will cause depriciation of krank and the appriciation of the dollar.

e. if we combined the situation (a) and (d) the prices of the US goods will be almost equal to the price of the country K's goods so there will be no impact on the value of dollar and krank. if we combined the situation (c) and (b) the higher income people will ivest in the US only so there will not any impact on the overall demand and supply of the dollar and the krank. so there will no impact on the value of the dollar and krank and the value remains stable.

I hope my efforts will be fruitful to you........


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