Exhibit 11.1

Assume the following: (1) the interest rate on six-month treasury bills is 8 percent per annum in the United Kingdom and 4 percent per annum in the United States; (2) today's spot price of the pound is $1.50, while the six-month forward price of the pound is $1.485.

-Refer to Figure 12.2.If Swiss manufacturing costs increase relative to those of the United States, then there would occur an increase in the supply of francs and an appreciation in the dollar's exchange value.

Question

Exhibit 11.1

Assume the following: (1) the interest rate on six-month treasury bills is 8 percent per annum in the United Kingdom and 4 percent per annum in the United States; (2) today's spot price of the pound is $1.50, while the six-month forward price of the pound is $1.485.

-Refer to Figure 12.2.If Swiss manufacturing costs increase relative to those of the United States, then there would occur an increase in the supply of francs and an appreciation in the dollar's exchange value.

Quizplus · Accepted Answer

If Swiss manufacturing costs increase relative to those of the United States, Swiss goods become more expensive, leading to decreased demand for Swiss exports. This results in an increased supply of francs in the foreign exchange market as Swiss exporters convert their earnings back to francs, and a decrease in demand for francs as importers spend less on Swiss goods. Consequently, the value of the franc decreases relative to the dollar, leading to an appreciation of the dollar's exchange value.

Exhibit 11.1 Assume the Following: (1) the Interest Rate on Six-Month Treasury