Answer the following: a. Explain why the interest parity condition must hold if the foreign exchange market is in equilibrium. b. Explain why overshooting occurs. What can the Central Bank do to mitigate its effects?
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- Does arbitrage destabilize foreign exchange markets? If yes, which argument do yousupport? offer your own opinion on this issue.Does Arbitrage destabilize foreign exchange markets? Support your logic about that statementWhich of the following is not an argument for central bank intervention? Exchange rates are highly volatile. Exchange rate fluctuations have an adverse effect on the macroeconomy. The market knows better than economic policy makers what the appropriate level of the exchange rate is. Central bank intervention can smooth out fluctuations in exchange rates.
- The deterioration of economic conditions; deterioration of the value of the local currency in terms of the bank’s base currency; convertibility or transfer risks; market crisis are examples of what kinds of risk? Select one: a. Solvency risk b. Foreign exchange risk c. Sovereign risk d. Credit riskHow can the company use currency options to hedge against exchange rate risk?What do you know about arbitrage opportunity? Discuss with examples. Also, present a scenario of any type of international arbitrage if possible. If so, how would it be executed and how would market forces be affected? Does arbitrage opportunity destabilize foreign exchange markets?
- What type of banking risk includes deterioration of the value of the local currency in terms of the bank’s base currency; convertibility or transfer risks. a. Credit Risk b. Liquidity Risk c. Foreign Exchange Risk d. Interest Rate Risk3. Consider the monetary neutrality. Suppose that the central bank changed the money supply. According to economists’ assumption on monetary neutrality, could the change affect the employment in the short-run? How about in the long-run? Short-run: Long-run:In the interest parity condition, why does the market exchange rate relate negatively to the interest rate?
- Explain the managed floating exchange rate regime. How can the monetary authorities prevent effects of these exchange rate regime on money supply level and why the most of the emerging countries prefer to use this policy?In the Mundell-Fleming model with floating, exchange rates, explain what happens to aggregate income, the exchange rate, and the trade balance when the money supply is reduced. What would happen if exchange rates were fixed rather than floating?Critically discuss whether the emergence of cryptocurrencies can disrupt the fiat-based international monetary system.