1) a-Consider that you are an individual purchasing euro in the US market. Graph

Question

1) a-Consider that you are an individual purchasing euro in the US market. Graphically explain what would happen if the supply of the foreign currency goes up in the domestic market. what can you say about the dollar and euro?

         b- Now consider that the European inflation falls down to 2% from 5%. the US inflation falls        from 5% to 3%. what happens to the US demand for European goods? what happen to the value of the dollar?

2)In the currency market, assume that there exists an exercise price of $X. As an investor in the currency market you try to exercise the “call option “in the market, but you are not able to do so. what does the statement mean? Explain

3)Suppose that you are a manager of ABC Bank. The saving and loan sector of the ABC Bank is engaged in speculative lending but is also exposed to risks by making long-term mortgages that where funded by short-term deposit. this created an interest rate risk. what is method would you come up with to protect ABC Bank against insurance risk?

4)Risk Premium is an important determinant of the rate of return on the bank loan. if the Mexican economy is observing a positive growth in GDP, what does this imply about the Mexican economy and what can infer about the risk premium offered by the commercial banks across Mexican?

5)Assume the following exchange rate quotes on British pounds:

                               Bid         Ask

Orleans Bank      $1.46       $1.47

Kansas Bank         1.48         1.49

Explain how locational arbitrage would occur. Also explain why this arbitrage will realign the exchange rates.

Explanation / Answer

4)It implies that mexican economy is doing well and its risk premium is less compared to other countries

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