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Sapling Independent is a small bank located in Hong Kong. Sapling Independent is interested in increasing the number of mortgages it writes, but it is constrained by how many deposits it has. It has decided to borrow 12,000,000 euros from a large German bank for one year. The German bank is going to charge Sapling Independent an interest rate of 1.500% per year. The German bank insists on being repaid in euros. After Sapling Independent borrows the money, it is going to have to convert the money into Hong Kong dollars at an exchange rate of 13.000 HK dollars/euro. Then Sapling Independent is going to lend all the money at an interest rate of 6.000% per year. At the end of one year, all the money that Sapling Independent lent will be repaid, plus interest. Finally, at the end of one year, Sapling Learning is going to have to repay its loan to the German bank in euros. At the end of the year, the exchange rate is 11.500 HK dollars/euro. What is Sapling Independent's profit from this series of transactions in Hong Kong dollars?

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Joshua Stredder
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Related questions

2. Assume that you are able to borrow $1,000,000 from a local bank. Explain how you could make profits from arbitrage in the following situations. Explain also the amount of profits that you would make, assuming that there are no brokerage or transactions costs.

a. The current dollar-Euro exchange rate (E$/€) is equal to 1.1 in Frankfurt and 1.05 in New York.

b. The dollar-Euro exchange rate (E$/€) = 1.1, the dollar-pound exchange rate (E$/£)= 1.5, and the pound-Euro rate (E£/€ )= .8.

c. The nominal interest rate equals 3% in the U.S. and 1% in Europe, the current dollar-Euro exchange rate (E$/€) is equal to 1, the forward exchange rate (F$/€) is equal to 1.02 and your expected exchange rate one year from now (Ee$/€) equals 1.05.

3. Use the information below to answer question 3.

L M Y

U.S 0.1 2,000 10,000

U.K 0.04 500 5,000

a. Calculate the price levels in both the U.S. and the U.K. according to the quantity theory of money.

b. Calculate the nominal exchange rate (dollars per pound) assuming the quantity theory of money and absolute PPP.

c. Assume that output rises in the U.S. to 11,000. Calculate the new nominal exchange rate.

d. Assume that output in the U.S. is 10,000 but that the money supply rises to 2,200 in the U.S. and to 600 in the U.K. Calculate the new nominal exchange rate.

e. Assume values at the beginning of the problem but assumethat L in the U.K. rises to .06. Calculate the new nominal exchange rate.

QUESTION 46

When the Fed buys a U.S. bond in the open market

its action has no effect on the total reserves or the money supply because the check it writes increases reserves at one bank but they fall at another.

its action expands total reserves and the money supply.

its action contracts total reserves and the money supply.

total reserves increase by the amount of the purchase but the money supply stays the same.

1.11 points

QUESTION 47

When the Fed sells government securities,

reserves increase, leading to a decrease in the money supply by an amount more than the sale of the government securities.

reserves decrease, leading to a decrease in the money supply by an amount more than the sale of the government securities.

reserves increase, leading to a increase in the money supply by an amount more than the sale of the government securities.

reserves decrease, leading to a increase in the money supply by an amount more than the sale of the government securities.

1.11 points

QUESTION 48

The maximum potential money multiplier is equal to

the reserve ratio.

one minus the reserve ratio

the inverse of the required reserve ratio.

the number of dollars on reserve.

1.11 points

QUESTION 49

The potential money multiplier gives us

the growth in the money supply when income increases.

the growth in real national income when the money supply increases.

the maximum potential change in the money supply due to a change in income.

the maximum potential change in the money supply due to a change in reserves.

1.11 points

QUESTION 50

An increase in the reserve ratio

increases the money multiplier.

will cause banks to make more loans.

has an expansionary effect on the money supply.

has a contractionary effect on the money supply.

1.11 points

QUESTION 51

The Federal Deposit Insurance Corporation insures

banks against lawsuits.

the deposits held in member banks.

the deposits held in the Fed.

the federal funds market.

1.11 points

QUESTION 52

Bank runs are a possibility because

in difficult times people want currency instead of demand deposits.

the FDIC is inefficient.

banks do not keep enough reserves to cover all their depository liabilities.

bankers are often poor businesspeople.

1.11 points

QUESTION 53

The manner in which FDIC deposit insurance is set up in the United States encourages banks to

make riskier loans than they otherwise would.

reject some loans that probably would be profitable.

maintain excess reserves that are too great.

be too conservative in their lending practices.

1.11 points

QUESTION 54

The Federal Deposit Insurance Corporation

discourages banks from engaging in excessive risk taking.

was established after the Panic of 1907.

only insures deposits in money-center banks.

increases the stability of the banking system by reducing the likelihood of bank runs.

1.11 points

QUESTION 55

What are the two features of money that distinguish it from all other goods in the economy?

Money is government issued and it is redeemable for gold or silver.

Money is part of every barter transaction and it is divisible.

Money is accepted as a medium of exchange and it is the common unit of account used to express prices.

Money is a common unit of account and it is also can be traded for other currencies at a guaranteed exchange rate.

1.11 points

QUESTION 56

Holding money to meet unplanned expenditures and emergencies is known as

asset demand.

precautionary demand.

aggregate demand.

transactions demand.

1.11 points

QUESTION 57

When people want to hold money to make regular planned expenditures, this is

the transaction demand for money.

the spending demand for money.

the asset demand for money.

the precautionary demand for money.

1.11 points

QUESTION 58

When interest rates rise, the transactions demand for money usually

decreases.

increases.

decreases initially and then increases to the original position.

does not change.

1.11 points

QUESTION 59

As nominal Gross Domestic Product (GDP) rises, the transactions demand for money

increases, and the money demand curve shifts to the right.

remains constant, and the money demand curve remains the same.

decreases, and the money demand curve shifts to the left.

increases, and the money demand curve shifts to the left.

1.11 points

QUESTION 60

One of the economic costs of holding currency is that

it fulfills no precautionary role.

it fulfills no transactions role.

it earns no interest income.

its real value always increases.

1. In which market will a company arrange to receive currency for a transaction at a future date?

Select one:

a. the forward market

b. the currency futures market

c. the arbitrage market

d. the forward spot market

2. The U.S. dollar is overvalued and the peso is undervalued in the foreign exchange market

Select one:

a. if a visitor to Mexico from the United States can buy more goods in the United States
than he can buy in Mexico when he converts dollars to pesos.

b. if a visitor to Mexico from the United States can buy the same amount of goods in
Mexico as he can buy in the United States when he converts dollars to pesos.

c. if a visitor to Mexico from the United States can buy more goods in Mexico than he can
buy in the United States when he converts pesos to dollars.

d. if a visitor to Mexico from the United States can buy more goods in Mexico than he can
buy in the United States when he converts dollars to pesos.

3. Given the following data (t is current time; t+1 is time after one period)

Et = ¥ 110 = $1

Et+1 = ¥ 95 = $1

Current Interest rate in the US = iUS= 8%

If the interest parity condition is expected to hold, interest rates in Japan (iJapan) should equal approximately:

Select one:

a. 3.38%

b. 8%

c. -5.64%

d. None of the above.

4. Suppose the Japanese interest rate is I% while the interest rate in Britain is 3%. Interest rate parity predicts that relative to the Japanese Yen,

Select one:

a. the British pound will depreciate by 4%.

b. the British pound will appreciate by 2%.

c. the British pound will depreciate by 2%.

d. the British pound will appreciate by 4%.

5. Suppose the U.S. grows more slowly than Canada. The best medium term prediction is that the

Select one:

a. U.S. interest rates will rise.

b. U.S. dollar will appreciate against the Canadian dollar.

c. U.S. dollar will depreciate against the Canadian dollar.

6. Purchasing Power Parity (PPP) implies that

Select one:

a. In the long run, a forward exchange rate can purchase an interest rate swap for the same
price as the spot rate.

b. In the medium run, a forward exchange rate can purchase an interest rate swap for the
same price as the spot rate.

c. The short run, a given amount of money can buy the same amount of goods, whether
they are purchased at home or abroad.

d. the long run, a given amount of money can buy the same amount of goods, whether
they are purchased at home or abroad.

7. The current account balance will fall if

Select one:

a. the real exchange rate depreciates and disposable income goes up

b. the real exchange rate appreciates or disposable income goes up

c. the real exchange rate depreciates or disposable income goes down

d. the real exchange rate appreciates and disposable income goes down

8. A person who paid $10 for an umbrella in the U.S. sees the exact same umbrella in a store in London, England for 6 British pounds. If the person could expect the real exchange rate to be 1 U.S. umbrella per 1 English umbrella, then the person could infer that the nominal exchange rate is

Select one:

a. 0.6 U.S. dollars per 1 English pound.

b. 1.67 U.S. dollars per 1 English pound.

c. 0.6 English pounds per I U.S. dollar.

d. 1.67 English pounds per 1 U.S. dollar.

9. A U.S. wine merchant travelling in France has found a French wine of the same quality as a U.S. wine they regularly sell. She assumes that the real exchange rate should be 1 case of U.S. wine equals one case of French wine. The French wine merchant will sell her a case of the French wine for 350 euros. She knows that a case of the equivalent U.S. wine sells for $400. The euro is selling in France for $1.20. Assuming transportation costs are zero, the U.S. wine merchant should

Select one:

a. buy the French wine and sell it in the U.S. and make a profit.

b. buy the U.S. wine and sell it in France and make a profit.

c. It doesn't matter either way; there is no profit in the deal.

d. None of the above.

10. In a fixed exchange rate system, how do countries address the problem of currency market pressures that threaten to lower or raise the value of their currency?

Select one:

a. If demand falls, then countries must increase demand by buying up the excess supply
with domestic currency.

b. If demand rises, countries must fill the excess demand for foreign currency by selling
their reserves.

c. If demand rises, then countries can adjust the value of the exchange rate to the desired
level.

d. A and B only.

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