Treck Co. expects to pay €200,000 in one month for its imports from Greece. It also expects to receive €450,000 for its exports to Italy in one month. Treck Co. estimates the standard deviation of monthly percentage changes of the euro to be 3 percent over the last 40 months. Assume that these percentage changes are normally distributed. Using the value-at-risk (VAR) method based on a 95% confidence level, what is the maximum one-month loss in dollars if the expected percentage change of the euro during next month is -2%? Assume that the current spot rate of the euro (before considering the maximum one-month loss) is $1.23.

Collateral requirements lessen the consequences of ________ because the collateral reduces the lender’s losses in the case of a loan default, and it reduces ________ because the borrower has more to lose from a default.

In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market purchase ________ the supply of reserves and causes the federal funds interest rate to ________, everything else held constant.

An example of indirect intervention by the Bank of Japan would be for the Bank of Japan to use interest rates to increase the value of the yen vs. the dollar.

The following regression analysis was conducted for the inflation rate information and exchange rate of the British pound:   eBP = ao + a1[(1+IU.S.)/(1+IU.K.) – 1] + µ   Regression results indicate that ao = 0 and a1 = 1. Therefore:

The interest rate on pounds in the U.K. is 8%. The interest rate in the U.S. is 5%. Interest rate parity exists. U.S. investors will earn a lower nominal return domestically than British investors earn domestically.

As information technology improves, the lending role of financial institutions such as banks should ______________.

Assume the Fed desires to strengthen the dollar. If it buys dollars and simultaneously buys Treasury securities, this is an example of sterilized intervention.

Consider an MNC that is exposed to the Taiwan dollar (TWD) and the Egyptian pound (EGP). 25% of the MNC’s funds are Taiwan dollars and 75% are pounds. The standard deviation of exchange movements is 5% for Taiwan dollars and 7% for pounds. The correlation coefficient between movements in the value of the Taiwan dollar and the pound is .7. Based on this information, the standard deviation of this two-currency portfolio is approximately:

Given a home country and a foreign country, purchasing power parity suggests that: