Economics 300
Exchange Rates Homework

1.       Please define exchange rates

2.       Why are exchange rates needed or what is the role of exchange rates?

3.       Why would Americans demand foreign currency?

4.       Please explain the difference between spot and forward exchange rates

5.       Why are forward rates useful?

6.       Visit http://www.x-rates.com/ and

a.       Clicking where it says table, find the exchange rate between the US dollar and the Brazilian Real, also obtain the exchange rate between the US dollar and the Euro. State both in terms of foreign currency you can buy with a US dollar.

b.      Calculate the implied exchange rate between the Brazilian Real and the Euro (how many Euros does a Real buy?). Show your work.

Using the site above, confirm if the actual exchange rate between the Brazilian Real and the Euro are the same as the implied rate.

c.       Suppose that instead, that you can buy a 0.80 of a Euro with a Brazilian Real.  If you had $100,000 US, what transactions could you make to make some riskless profits? Show your work.

7.       On the site above, look for the historical exchange rate between the US dollar and the Chinese Yuan in terms of the number of Yuan a dollar can buy, attach the graph

a.       What has happened to the US dollar? Has it appreciated it or depreciated?

b.      As a consequence, what has happened to the price of Chinese products for Americans? Use an example, even if imaginary.

c.       As a consequence, what has happened to the price of American products for Chinese? Use an example, even if imaginary.

d.      If this trend continues, what do you expect would happen to the US trade deficit with China over time?  

e.      Who in the US would benefit from the dollar depreciating in relation to the Yuan and who would be hurt?