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Chapter 1
Currency Exchange Rates

1. Since the value of the British pound in U.S. dollars has gone down, it has depreciated with respect to the U.S. dollar. Therefore, the British will have to spend more British pounds to purchase U.S. goods. Accordingly, the correct answer is (c).

2. Since the number of Australian dollars needed to purchase one U.S. dollar has decreased from 1.60to 1.50, the Australian dollar has appreciated with respect to the U.S. dollar. Therefore, the Australians will have to spend fewer Australian dollars to purchase U.S. goods. Accordingly, the correct answer is (a).

3. The value of the dollar in Swiss francs has gone up from about 1.20 to about 1.60. Therefore, the dollar has appreciated relative to the Swiss franc, and the dollars neededby Americans to purchase Swiss goods have decreased. Thus, the statement is correct.

4. a. One baht was worth 1/25 or 0.04 dollars earlier. It is worth 1/30 or 0.0333 dollars now. Thus,
the baht has depreciated with respect to the dollar. Percentage change in the dollar value of the
baht ’ ((0.0333 − 0.04)/0.04)100% ’ −16.7%.
b. One dollar was worth 25 bahts earlierand is worth 30 bahts now. Percentage change in the value of the dollar ’ ((30 − 25)/25)100% ’ 20.0%.

5. The increase in £:\$ exchange rate implies that the pound has appreciated with respect to the dollar. This is unfavorable to the trader since the trader has a short position in pounds.
Bank’s liability in dollars initially was 5,000,0000 ( 1.45 ’ \$7,250,000
Bank’s liabilityin dollars now is 5,000,0000 ( 1.51 ’ \$7,550,000

Thus, the bank’s liability has increased by \$300,000.

6. Three cross-exchange rates need to be computed: SFr/€, ¥/€, SFr/¥.
a. €:SFr ’ \$:SFr ( €:\$ ’ SFr 1.5971 per \$ ( \$ 0.9119 per € ’ 1.4564
b. €:¥ ’ \$:¥ ( €:\$ ’ ¥ 128.17 per \$ ( \$ 0.9119 per € ’ 116.88
c. ¥:SFr ’ \$:SFr ( ¥:\$ ’ (\$:SFr ) ( (\$:¥) ’ (SFr 1.5971 per \$)/(¥128.17 per \$) ’ 0.0125

7. These quotations mean that Bank A is willing to buy one euro for 1.1210 dollars (bid rate) or to
sell one for 1.1215 dollars (ask rate). Bank B’s €:\$ bid rate is 1.1212; its ask rate is 1.1217. That is,
Bank B is willing to buy one euro for 1.1212 dollars or to sell one for 1.1217 dollars.

8. The percentage spread is considerably higher for thePolish zloty than for the British pound. The market for the Polish zloty is much less liquid than the market for the British pound. There is a lot more competition between market makers for the British pound than for the Polish zloty. Consequently, the percentage spread is considerably higher for the Polish zloty than for the British pound.

9. These quotes are unreasonable because theydeviate from Bank A to Bank B by more than the
spread; for example, Bank A’s ask rate (121.25) is smaller than Bank B’s bid rate (121.30). There is, therefore, an arbitrage opportunity. One can buy Bank A’s dollars for 121.25 yen per dollar, sell these dollars to Bank B for 121.30 yen per dollar, and thereby make a profit of 0.05 yen per dollar traded. This is a riskless, instantaneous operationthat requires no initial investment.

10. The €:SFr quotation is obtained as follows. In obtaining this quotation, we keep in mind that €:SFr ’ \$:SFr ( €:\$, and that the price for each transaction (bid or ask) is the one that is more advantageous