1. Read the excerpt below from Wall Street journal and answer questions: … last week, the dollar ranged from 135. 85 to 111.45 yen. While analysts used to see four-yen moves of the dollar as volatile, a repeat of last week’s ranges won’t come as a surprise this week. Last Friday in New York, the dollar was trading at 116.68 yen, down from 119.45 Thursday. The U.S. currency also traded at 1.6368 marks, up from 1.6350. Sterling was at $1.7065, down from $1.7110. Qs: 1.Is the exchange rate quote for the U.S. dollar a direct or indirect quote on the (a) yen? (b) mark? (c) sterling (British pound)? 2.(a) From Thursday to Friday, what percentage change in the value of the dollar occurred against the yen? (b) sterling (Remember to mind your quoted and base currencies!) 3.Using the mark as the base currency, what is Friday’s cross rate between the yen and mark? 4.Using sterling as the base currency, what is Friday’s cross rate between the mark and sterling?

2. 1. The exchange rate quote for the U.S. dollar is: a) A direct quote on the yen. b) A direct quote on the mark. c) An indirect quote on sterling (the pound). 2. a) {(116.68 - 119.45) / 119.45} x 100% = -2.32% b) First, we convert the direct quote on the U.S. dollar to an indirect quote on the dollar. This makes the dollar the base currency and we can therefore calculate the change in its value. We convert the quote of $1.7065/pound by dividing 1.7065 into 1 to get 0.5860 pounds/$. We convert the quote of $1.7110/pound by dividing 1.7110 into 1 to get 0.5845 pounds/$. Plugging these numbers into our formula [{(0.5860 – 0.5845) / 0.5845} x 100] we arrive at an answer of +0.26%. 3. Friday’s cross rate between the yen and mark (with the mark as the base currency) is ¥ 71.285/DM (116.68/1.6368). 4. To calculate Friday’s cross rate between the mark and sterling, we first convert the indirect quote on sterling to a direct quote on sterling by dividing 1.7065 into 1 to get 0.5860 pounds/$. Thus Friday’s cross rate between the mark and sterling (with sterling as the base currency) is DM2.7932/pound (DM1.6368 / 0.5860).

3. International Monetary System Learn how exchange rates affect domestic and international companies Review factors that affect exchange rates Learn how exchange rates are forecasted Discuss how the international monetary system evolved and how it operates Explain the European monetary system and assess its performance record

4. FinancialDecisionsFinancialDecisions MarketingDecisionsMarketingDecisions Stability and Predictability Stability ProductionDecisionsProductionDecisions Exchange Rates and Business Exchange Rates and Business

5. Factors That Determine Exchange Rates Products Are Identical in Quality and Content in All Countries Law of One Price Products Are Entirely Produced within Each Particular Country

6. Factors That Determine Exchange Rates Understanding the Role of Interest Rates Parity of Purchasing Power Considering the Role of Inflation

7. Parity of PurchasingPower TradeBarriers BusinessConfidence AddedCosts Psychology

8. Inefficient Market View Efficient Forecasting Exchange Rates

9. TechnicalAnalysisFundamentalAnalysis Forecasting Techniques

10. Evolution of the International Monetary System

11. The Gold StandardAdvantages StandardAdvantagesReducingExchange- Rate Risk ReducingExchange- Imposing Strict Monetary PoliciesImposing Policies CorrectingTradeImbalancesCorrectingTradeImbalances

12. Collapse of the Gold Standard Devaluation of Currency Arbitrary Par Values

13. The Bretton Woods Agreement The World Bank Fixed Exchange Rates International Monetary Fund Built-InFlexibility

14. Special Drawing Rights

15. Weakness of the U.S. Dollar The Smithsonian Agreement High U.S. Trade Deficit High U.S. Budget Deficit Collapse of the Bretton Woods Agreement

16. The Managed Float System Louvre Agreement Louvre Agreement Plaza Accord Plaza Accord Jamaica Agreement Jamaica Agreement

17. Exchange Rates Today Pegged exchange rates Limited flexibility exchange rates More flexible exchange rates

18. Recent Financial Crises The Debt Crisis Mexico’s Peso Crisis Southeast Asia’s Currency Crisis

19. Future of the International Monetary System Reform of the IMF Reform One World, Ready or Not One World, Ready or Not

20. The European Monetary System PromoteTrade Set Rates of Exchange MinimizeInflation