PROBLEM 3- Questions 36-39 Assume that you expect that the European central bank

Question

PROBLEM 3- Questions 36-39 Assume that you expect that the European central bank (ECB) plans to engage in central bank intervention in which it plans to use euros to purchase a substantial amount of U.S. dollars in the foreign exchange market over the next month. Assume that this direct intervention is expected to be successful at influencing the exchange rate. Would you purchase or sell call options on euros today? sell call options purchase call options QUESTION 37 Would you purchase or sell futures on euros today? sell futures purchase futures QUESTION 38 So as not to effect the money supply, the ECB should conduct a by dirty float; buying sovereign bonds sterilized intervention; selling sovereign bonds nonsterilized intervention; no offsetting open market operations sterilized intervention; buying sovereign bonds ) none of the above

Explanation / Answer

1.) we would sell Call option on euros today as the intervention results in a weaker Euro. Hence we would sell call option on euros today.

2.) We would sell futures on euro today as the intervention results in a weaker Euro. Hence we would sell Futures on euros today.

3.) So as not to effect the money supply the ECB should conduct a Sterlized intervention and buying sovergin bonds as The sterlizied interevntio doesnt effect the money supply of the ECB bonds

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