Show that if two currencies i and j independently maintain their exchange rate within a band of fluctuations defined as +/−1 percent around a par value S_$,i(t)_PAR or S_$,j(t)_PAR vis-à-vis the U.S. dollar, the currencies i and j will automatically maintain their cross exchange rate within a band of fluctuations +/−2 percent around their cross par value S_i,j(t)_PAR.

Cross exchange rate S_i,j(t) is simply defined as S_$,j(t)/S_$,_i(t). Similarly, a cross par value is defined as:

Transcribed Image Text:

[S(0)]PAR=[SS,(0)]PAR/[SS,,(0)]PAR