Homework #7

Directions: Answer the following questions on a separate document. Explain how you reached the answer or show your work if a mathematical calculation is needed, or both.

Would you characterize the U.S. dollar as a freely floating or dirty float system? What characteristics support your answer?

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What is direct central bank intervention in the currency markets and provide an example of this from the last 50 years.

Assume that Canada suddenly experiences high inflation. How might this affect the value of the Canadian dollar according to the purchasing power parity (PPP) theory?

Australia’s central bank decides to increase the value of the Australian dollar against the Japanese yen. How might it use direct intervention to do this?

Assume the following information: i. Mexican one-year interest rate = 15% ii. U.S. one-year interest rate = 11% iii. If interest rate parity exists, what would be the forward premium or discount on the Mexican peso’s forward rate? Would covered interest arbitrage be more profitable to U.S. investors than investing at home? Explain.

Create a balance sheet for a typical bank, showing its main liabilities (sources of funds) and assets (uses of funds). 

The Federal Reserve has increasingly favored the use of Repurchase Agreements as part of its open market operations. Briefly describe these and why the Fed or banks prefer to use them.

Banks engage in proprietary trading as part of their operations. Briefly speculate on why they now must adhere to much more stringent trading activity as a result of the 2008-09 financial crises.

Briefly describe two off-balance sheet activities and why banks favor the use of these.

If you were the CEO of a US bank, would you consider establishing a foreign branch? What might be a concern related to doing so?

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