Financial Markets and Institutions (2-downloads)

397

3. If the interest rate is 4% on euro deposits and 2% on

dollar deposits, while the euro is trading at $1.30 per

euro, what does the market expect the exchange rate

to be one year from now?

4. If the dollar begins trading at $1.30 per euro, with the

same interest rates given in Problem 3, and the ECB

raises interest rates so that the rate on euro deposits

rises by 1 percentage point, what will happen to the

exchange rate (assuming that the expected future

exchange rate is unchanged)?

5. If the balance in the current account increases by

$2 billion while the capital account is off $3.5 bil-

lion, what is the effect on governmental interna-

tional reserves?

W E B   E X E R C I S E S

The International Financial System

1. The Federal Reserve publishes information online that

explains the workings of the foreign exchange mar-

ket. One such publication can be found at