4. Solve the following problems. Please leave your footprints. (a) Over the year

Question

4. Solve the following problems. Please leave your footprints. (a) Over the year, the Bank of Korea increased its foreign exchange reserves by 5 billion dollars. What would be Korea's balance in the financial capital account if its current-account balance was 50 billion dollar surplus? (b) The Wall Street Journal quotes the exchange rates for the Japanese yen and the British pound (8) as the following. Please calculate the yen-per-pound exchange rates, bid (buy) and ask (sell). For your reference, a cross trade between two non-dollar currencies is regarded as a combination of two separate trades, each buy and sell. Bid_Ask US per £ 1.2740 1.2743 per U$ 109.96 110.00 (c) In the international financial market, standard loans are quoted at the LIBOR rates. Assume t three-month LIBOR for the US dollar (S) is 1.25% PA (per annum), and that for the European euro (E) 2.50% PA. What would be the six-month forward rate of the euro in terms of the dollar (Tse), if the spot rate (Sse) is 1.1200? (*LIBOR: London interbank offered rate)

Explanation / Answer

First question is answered below

A)

Financial account (as part of BOP) includes change in official reserves with the economy.

If an economy's foreign exchange reserves increase by 5 billion dollars, its financial account balance will also increase by the same amount.

Current account balance will remain unchanged. Balance of payment account will increase by 5 billion.

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