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US 5%
Greece 10%
dollar per euro
Forward (one year) 2
Spot rate 1.5
Arbitrage
450
400
350
300
250
200
150
100
50
0
0 2000 4000 6000 8000 10000 12000
This is due to the fact that with the increase in amount there is an increase in the
surplus offered by arbitrage. This is due to two reasons. The first is that the
exchange rate has increased and the second is due to increased euro interest rate.
c
i
The difference between interest and principal in dollars and the proportional
exchange rate increase with respect to the interest rate with the dollar amount is
the net surplus in terms of market expectations.
Personal expectation is the simple phenomena pf getting more interest in return for
less dollar value. It can also be seen that the potential argument of the market is
much more objective than the personal expectation. It can also be seen that the
direction is positive and in return the surplus is also risk free.
ii
if the currency Euro had a bump due to Greece. It was observed that the potential of
this limit was subsided and first impact it suffered was based on international
transactions. As every other nation started to pull its reserves out of Greece. It was
definitely the wise move to move cash out of Greece, in terms of the first
opportunity.
Q2d
i
_=_+_ _(+1)^,
0<<1
ii
Long run equilibrium would hold and it would signify that the potential
reconnaissance is far more astounding than that of the short run
Q2e
i
this indicates the banker's percentage and its impact on the potential surplus of the
society. It can also be observed that the direction of the surplus depends upon this
percentage.
ii
_=(__)/(_(+1)^ ),
0<<1
iii
This fee is charged due to the fact that the potential weakness of the organization is
unidirectional and in order for the bank to trade it is obligatory for the organization
to cover the inter-currency exchange rate risk.