Question

Oporto is a new and upcoming food franchise in Australia, which has expanded its operations internationally. Oporto currently needs to convert its profit earned in the U.S. market into Australian dollars. The quote advertised by a local foreign exchange dealer in New York is AUD 1= USD 0.7600-0.7800

a) What is the commodity currency in the above quote? Is it a direct quotation or an indirect quotation? (1 mark)

b) What is the rate at which Oporto can exchange US dollars into Australian dollars? Explain why.

c) If Oporto has USD $10,000, how much AUD can it convert to given the rate it has accepted in part b). (1 mark)

d) If 3 month later, the Reserve Bank of Australia increases its cash rate, holding everything else being equal, would this change be more likely to result in an appreciation or a depreciation of AUD against USD? Briefly explain why.

e) If AUD moves by 50 points against USD in both bid and offer price, given your answer to part d), what is the new quotation in New York market? (1 mark)

f) Suppose Oporto now needs to buy USD with AUD to pay for its import bills, using your answer in part e), identify the rate at which Oporto buys USD and calculate how much AUD Oporto needs to buy USD $50,000?

Answer 1

a.) The commodity currency is USD. It is an indirect quotation.

b.) He can exchange it at 0.76 USD =1 AUD. At this rate his earnings in dollars will exchange in a higher amount of AUD.

c.) 0.76 USD = 1 AUD

10,000 USD = 13,157.89 AUD

d.) Increase in cash rate causes the other interest rate in the economy to rise. Higher interest rate reduces spending. It leads to decrease in economic activity and employment. it the decrease is stong, it lowers the prices in the market leading to deflation. It will lead to depreciation in the currency.