A Dutch company exporting to France had FF 3 million due in 90 days. Suppose that the spot exchange rate was FF 1 = DFl 0.3291.
a. Under the exchange rate mechanism, and assuming central rates of FF 6.45863/ECU and DFL 2.16979/ECU, what was the central cross-exchange rate between the two currencies?
b. Based on the answer to Part a, what was the most the Dutch company could lose on its French franc receivable, assuming that France and the Netherlands stuck to the ERM with a 15% band on either side of their central cross rate?
c. Redo Part b, assuming the band was narrowed to 2.25%.
d. Redo Part b, assuming you know nothing about the spot cross-exchange rate.

  • CreatedJune 27, 2014
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