Question

true or false: )

1. Like gold standard, the currency board (foreign exchange rate policy) is doomed to fail.

(2) You are to buy ¥200m with Australian dollars through a forward contract maturing in 6 months. The forward price is F6(¥/A$)=100. If the spot rate at the maturity is S6(¥/A$)=80. You have a loss in the forward trading.

(3) For euro to become a world currency, it is necessary that the eurozone countries run long-term trade deficits.

(4) For a country with a deficit in the current account, devaluation of domestic currency will help reduce the deficit immediately.

(5) In a nation which pegs its currency to the U.S. dollar at fixed exchange rates, it is very likely that the central bank must purchase dollars with its domestic currency when facing large trade surplus.

Answer 1

(2) False - if forward price is high and spot price is less this is the optimal value to buy any currency as it will give you the benefit on your invesment.

(3) False - if the countries having long term trade deficit than they never become a world currency for that you need to have a stable and growing economy with surplus in trade.

(4) False - the devaluation makes foreign products relatively more expensive for domestic consumers, thus discouraging imports. This may help to increase the country's exports and decrease imports, and may therefore help to reduce the current account deficit but not immediately.

(5) True - if the coutry wants the benefit of trade surplus it can purchase trade currency or in this case dollar for domestic currency as it will help them for future payments and less risk on countries economy.