International Finance Problems with Solutions 2022

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International finance
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Section A:
1 A). New exchange rate with increase in the dollar value
An increase in the dollar value implies that fewer dollars will be needed to purchase one
Euro. Therefore, the 2% increase in the dollar value will be calculated as follows:
Given the standard rate of EURUSD 1.1, the new exchange will be equal to
If 1EUR = USD 1.1,
Then a 2% increase in dollar value = 1.1- (1.1* 2
100 ) =1.1-0.022
=1.0780
Therefore, the new exchange EURUSD exchange rate will be 1.0780 dollars per 1 Euro.
B). the exchange rate for the GBPEUR
Given that EURUSD =1.1043 and GBPUSD =1.2970, then the GBPEUR cross exchange
rate will be calculated as below:
GBPEUR = GBPUSD
EURUSD
= 1. 2970
1. 1043 , 1.1745. Therefore, an individual will each pound at 1.1745 Euros.
c). relating the answer to triangular arbitration
By definition, triangular arbitration refers to a mechanism where arbitrager/individual
exchanges currencies for, making profits (Martinez, 2019). It is also notable that arbitration is

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majorly applicable in financial markets without equilibrium. For example, it would be more
profitable for an arbitrager who intends to exchange 10,000 Euros to pounds through triangular
arbitration.
Given that GBPEUR =1.1745 and that EURUSD = 1.1043, the arbitrager has two
options. He can either use a triangular arbitration mode of exchange or directly exchange Euros
to pounds.
i) Exchanging through triangular arbitration
From the rates: 1Euro =1.1043 dollars. Therefore Euros 10,000 = (10,000*1.1043)
=11043dollars.
And that 1GBP = $1.2970. Therefore the arbitrager would get (11,043/1.2970) =GBP 8,
5142637 (Chen,2019).
ii). Direct exchange from Euros to pounds
Given that GBPEUR =1.1745, then the arbitrager would get GBP 8514.2614 from the
transaction. (10,000/1.1745) = 8514.2614 pounds form directly exchanging 10,000 Euros to
pounds. The arbitration exchange is a better option for the arbitrager because it generates a profit
margin for the arbitrager. This is generated by (8514.2637-8514.2614) =0.0023 pounds. This will
be multiplied by the total amount exchanged in the transaction =Euros 23 (0.0023*10,000) (Cui
et al, 2019).
2. Inflation and purchasing power parity
Purchasing power parity can be defined as an economic theory through which currencies
of different countries can be compared either in relative or absolute terms through a “basket of