Question

35-) You have been hired as a consultant to the central bank for a country that...

35-) You have been hired as a consultant to the central bank for a country that has for many years suffered from repeated currency crises and depends heavily on the U.S. financial and product markets. Which of the following policies would have the greatest effectiveness for reducing currency volatility of the client country with the United States?

Select one:

a. an internationally floating exchange rate

b. an exchange rate pegged to the U.S. dollar

c. an exchange rate with a fixed price per ounce of gold

d. dollarization

36-) is the possibility that the borrower's creditworthiness is reclassified by the lender at the time of renewing credit. ________ is the risk of changes in interest rates charged at the time a financial contract rate is set.

Select one:

a. Credit risk; Interest rate risk

b. Credit risk; Repricing risk

c. Repricing risk; Credit risk

d. Interest rate risk; Credit risk

37-)

Given the following exchange rates, what arbitrage profit is available if you have $1 million? ¥129.87/$, €1.1226/$, ¥115.74/€

Select one:

a. $460

b. -$460

c. $878

d. $259,652

Homework Answers

Answer #1

Ans 35) Correct answer is option : d. d. dollarization

Answer 36) correct answer is option b. Credit risk; Repricing risk

answer 37 : correct answer is option a.

yen/USD 129.87
Euro/USD 1.1226
Yen/Euro 115.74
Based on above implied Yen/Euro rate = =129.87/1.1226
115.687
Therefore we have miss pricing situation and arbitrage situation exist
using $ 1 mil buy Euro =        1,122,600 Euro
Using Euro buy Yen =    129,929,724 Yen
Using yen buy USD =        1,000,460 USD
gain = 460
Therefore correct answer is option : a. 460
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