(i) The Chinese Renminbi (RMB) is very strong against the US dollar due to increased supply of dollars and has moved from 8 RMB/$1 to 6 RMB/$1. The People Bank of china decides to intervene by selling Renminbi and buying US dollars to move the exchange rate to 7RMB/$1. The intervention is of the non sterilized kind. Using a diagram for the supply and demand for dollars in the forex market, illustrate and comment on the intervention undertaken by the People Bank of China. Also comment on the implications of the intervention for the money supply in China and Chinese short term interest rates.
(i) The Chinese Renminbi (RMB) is very strong against the US dollar due to increased supply of dollars and has moved from 8 RMB/$1 to 6 RMB/$1. The People Bank of china decides to intervene by selling Renminbi and buying US dollars to move the exchange rate to 7RMB/$1. The intervention is of the non sterilized kind. Using a diagram for the supply and demand for dollars in the forex market, illustrate and comment on the intervention undertaken by the People Bank of China. Also comment on the implications of the intervention for the money supply in China and Chinese short term interest rates.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
![Question 4
(i)
The Chinese Renminbi (RMB) is very strong against the US dollar due to
increased supply of dollars and has moved from 8 RMB/$1 to 6 RMB/$1. The
People Bank of china decides to intervene by selling Renminbi and buying US
dollars to move the exchange rate to 7RMB/$1. The intervention is of the non
sterilized kind. Using a diagram for the supply and demand for dollars in the forex
market, illustrate and comment on the intervention undertaken by the People
Bank of China. Also comment on the implications of the intervention for the money
supply in China and Chinese short term interest rates.
(ii)
Assume that you start by borrowing either $100,000 or 10,500,000 Japanese
Yen. Using a starting yen per dollar exchange of 105 Yen per dollar and a one-
year US interest rate of 5% and one-year Japanese interest rate of 0.5%. Explain
how a hedge fund can use the carry trade to make profits or incur losses. In your
answer, show the profits or losses in both dollars and yen in the following four
cases [(i) to (iv)] making it clear in each case what the profit or loss is in both yen
and dollars.
(a) The exchange rate stays the same at 105 yen per dollar.
(b) The exchange rate moves to 75 yen per dollar
(ic) The exchange rate moves to 125 yen per dollar
(d) State the breakeven exchange rate for the carry trade](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fd7e3a8f9-0b31-43fa-8644-8b6dd13b0c5a%2Fe944ff60-5dcb-401a-a449-ac6dc277c872%2Fslw7vyn_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Question 4
(i)
The Chinese Renminbi (RMB) is very strong against the US dollar due to
increased supply of dollars and has moved from 8 RMB/$1 to 6 RMB/$1. The
People Bank of china decides to intervene by selling Renminbi and buying US
dollars to move the exchange rate to 7RMB/$1. The intervention is of the non
sterilized kind. Using a diagram for the supply and demand for dollars in the forex
market, illustrate and comment on the intervention undertaken by the People
Bank of China. Also comment on the implications of the intervention for the money
supply in China and Chinese short term interest rates.
(ii)
Assume that you start by borrowing either $100,000 or 10,500,000 Japanese
Yen. Using a starting yen per dollar exchange of 105 Yen per dollar and a one-
year US interest rate of 5% and one-year Japanese interest rate of 0.5%. Explain
how a hedge fund can use the carry trade to make profits or incur losses. In your
answer, show the profits or losses in both dollars and yen in the following four
cases [(i) to (iv)] making it clear in each case what the profit or loss is in both yen
and dollars.
(a) The exchange rate stays the same at 105 yen per dollar.
(b) The exchange rate moves to 75 yen per dollar
(ic) The exchange rate moves to 125 yen per dollar
(d) State the breakeven exchange rate for the carry trade
Expert Solution
![](/static/compass_v2/shared-icons/check-mark.png)
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 7 steps with 2 images
![Blurred answer](/static/compass_v2/solution-images/blurred-answer.jpg)
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you
![ENGR.ECONOMIC ANALYSIS](https://compass-isbn-assets.s3.amazonaws.com/isbn_cover_images/9780190931919/9780190931919_smallCoverImage.gif)
![Principles of Economics (12th Edition)](https://www.bartleby.com/isbn_cover_images/9780134078779/9780134078779_smallCoverImage.gif)
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
![Engineering Economy (17th Edition)](https://www.bartleby.com/isbn_cover_images/9780134870069/9780134870069_smallCoverImage.gif)
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
![ENGR.ECONOMIC ANALYSIS](https://compass-isbn-assets.s3.amazonaws.com/isbn_cover_images/9780190931919/9780190931919_smallCoverImage.gif)
![Principles of Economics (12th Edition)](https://www.bartleby.com/isbn_cover_images/9780134078779/9780134078779_smallCoverImage.gif)
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
![Engineering Economy (17th Edition)](https://www.bartleby.com/isbn_cover_images/9780134870069/9780134870069_smallCoverImage.gif)
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
![Principles of Economics (MindTap Course List)](https://www.bartleby.com/isbn_cover_images/9781305585126/9781305585126_smallCoverImage.gif)
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
![Managerial Economics: A Problem Solving Approach](https://www.bartleby.com/isbn_cover_images/9781337106665/9781337106665_smallCoverImage.gif)
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
![Managerial Economics & Business Strategy (Mcgraw-…](https://www.bartleby.com/isbn_cover_images/9781259290619/9781259290619_smallCoverImage.gif)
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education