samplequizanswers,100503.docVIP

Sample Quiz Answers, 10/05/03. Question 1. (4 points) Please answer Uonly oneU of the two questions. 1. As we know, Hong Kong has a fixed exchange rate regime (currency board). Suppose Hong Kong runs consistently BOP surpluses. If we believe in the BOP approach to exchange rate determination, what will we expect happening to the HK$/US$ rate? Why? The HK$/US$ rate will revaluate. According to the BOP approach of exchange rate determination, the surplus on BOP indicates high demand for the HK$, so its price (exchange rate) in US$ will increase. 2. Why surplus in the current account will lead to an appreciation of the home currency, if we believe in the portfolio-balance approach to exchange rate determination? A surplus in the current account implies more financial wealth coming into the country, which then will translate into higher demand for the country’s currency (businesses and individuals in that country, being wealthier, will keep their wealth locally, so the demand for the domestic currency will increase). Question 2. (4 points) Please answer Uonly oneU of the two questions. 1. Who are the main participants in the forex market (give me at least three of them). Briefly describe why are they in the market (e.g for profit, speculation, hedging purposes). The main participants in the forex market are: Bank and Non-bank Dealers (they are in the market trading for profit through the bid-ask spread) Businesses individuals (they enter the market to facilitate underlying investment or commercial transactions). Speculators arbitrageurs (they are in the market seeking to profit from the volatility of exchange rates). Treasuries Central Banks (they use the market to acquire or spend their country’s foreign exchange reserves as well as to influence the price at which their own currency is traded). Brokers (facilitate trade between dealers without themselves becoming principals in the transaction). 2. Suppose the bid quote for the spot rate is Yen 11