Question

Suppose the British pound is a wealth $1.2613and after a period of 6 months the spot rate changes to $1.3065 to a pound.

c) Suppose the UK borrowed 4 billion dollars which it sold to buttress up the pound, what could be the bank of UKs pound losses on this currency intervention

d) Suppose USA spends 24 billion dollars in an attempt to defend the pound what were the US bank dollar losses or profit on its currency intervention.

Answer 1

6 months earlier, 1 British Pound = $1.2613

Now, 1 Bristish Pound = $1.3065

c) UK borrowed 4 billion dollars from U.S.

6 months before, 4 billion dollars were equals to (4 / 1.2613) = 3.1713 billion pounds

Now, 3.1713 billion pounds is worth 3.1713 * $1.3065 = 4.14 billion dollars

Thus, there is a loss of bank of UKs of 4.14 billion dollars - 4 billion dollars = 0.14 billion dollars which is 0.109 billion pound

d) USA spends 24 billion dollars to defend the pound.

6 months earlier, 24 billion dollars were equal to (24 / 1.2613) = 20.66 billion pounds

Now, 20.66 billion pounds is worth (20.66 * $1.3065) = 27 billion dollars

Thus, US bank gets profit of 27 billion dollars - 24 billion dollars = 3 billion dollars