Dayyan Ahmed

Assignment 11

1. In Munich a bratwurst costs 5 euros; a hot dog costs $4 at Boston’s Fenway Park.
At an exchange rate of $ 1.05 per Euro, what is the price of a bratwurst in terms of
a hot dog? All else equal, how does this relative price change if the dollar
depreciates to $1.25 per euro? Compared with the initial situation, has a hot dog
become more or less expensive relative to a bratwurst?

At an exchange rate of 1.05 $ per euro, a 5 euro bratwurst costs 1.05$/euro ⋅ 5

euros = $5.25. Subsequently, the bratwurst in Munich is $1.25 more expensive
than the wiener in Boston. The overall cost is $5.25/$4 = 1.31.

2. A U.S. dollar costs 7.5 Norwegian kroner, but the same dollar can be purchased
for 1.25 Swiss francs. What is the Norwegian krone/Swiss franc exchange rate?

7.5/1.25
=6
6 Kronen = 1 Swiss Franc

3. Petroleum is sold in a world market and tends to be priced in U.S. dollars. The
Nippon Steel Chemical Group of Japan must import petroleum to use in
manufacturing plastics and other products. How are its profits affected when the
yen depreciates against the dollar?

Dollar is going to appreciates.

Petroleum will be more expensive for Japan so the profits will be reduced.

4. Define the following terms:

a) Arbitrage
The synchronous purchasing and selling of protections, currency, or wares in
various markets or in subordinate structures to exploit varying prices for a similar
resource.
b) Vehicle currency
The dollar is the "vehicle currency
Moreover non-dollar economies will engage in currency trade indirectly using
the U.S. dollar instead of using direct bilateral trade among their own currencies

c) Spot and forward exchange rates

In currency markets, the spot rate, as in many markets, alludes to the quick
exchange rate. The forward rate, then again, alludes to the future exchange rate
settled upon in forward agreements.
d) Foreign exchange swaps exchange trade, otherwise called a FX trade, is a consent
to exchange currency between two unfamiliar gatherings. The arrangement
comprises of trading head and interest installments on a credit made in one
currency for head and interest installments of an advance of equivalent worth in
another currency. One gathering gets currency from a second gathering as it at the
same time loans another currency to that party.