Question 2 - Topic: Exchange Rate Determination (15 marks)

The spot bid-offer rates between Australian dollar and pounds (GBP/AUD) is quoted as 0.5144 0.5149. Speculator A expects the exchange rate to be 0.5130 0.5140, whereas Speculator B expects the exchange rate to be 0.5150 0.5155, in two months from the initial quotes.

a) Based on the expectations of the two speculators, which currency will appreciate and which currency will depreciate from the view of Speculator A, and Speculator B? [3 marks]

b) Determine the appropriate strategy between buy-low-sell-high, and short-sell positions on the AUD that each Speculator (A and B) should take given the bid-offer rates at t = 0 and their respective expected rates t = 2 months, to realize a profit. [4 marks]

c) Based on your answers to part (b), calculate the profit in basis points for the different positions taken by Speculator A and B, respectively. [8 marks]

Question 3 - Topic: The Balance of Payments and the Effective Exchange Rates (15 marks)

You are given the following information:

Quantity of imports	300,000 units
Foreign currency price of imports in NZD	$20/unit
Exchange Rate (FJD/NZD)	1.3960

Using the given information:

a) Calculate the foreign currency (NZD) value of imports. [2 marks]

b) Calculate the domestic currency (NZD) value of imports [2 marks]

c) Determine the new quantity of imports if the exchange rate falls to 1.3900, and the elasticity of demand is -0.80. [6 marks]

d) Using the results in part (c), determine the new foreign (NZD) and domestic (FJD) currency value of imports. [5 marks]