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Balance Sheets, Double-Entry Bookkeeping and Currency Arbitrage Questions

1. Describe, and illustrate with balance sheets of both the Bank of Canada and the direct clearers with the Canadian Payments Association, the change in the monetary base in response to the following transactions:

a. A Bank of Canada open market sale to the public of $100 million of Government of Canada securities.

b. A deposit of $200 million worth of Government of Canada deposits.

c. A $300 million advance made by the Bank of Canada to a chartered bank.

d. A $400 million Purchase and Resale Agreement made by the Bank of Canada with the money market jobbers.

e. The Bank of Canada intervenes in the foreign exchange market with a $500 million purchase of American currency ($US 1.00 = $Can. 1.55). It uses an open market transaction to sterilize its foreign exchange intervention.

f. Rather than an open market transaction, the Bank of Canada shifts Government of Canada deposits to sterilize its foreign exchange intervention in (e) above.

2. Indicate how each of the following international transactions is entered into the Canadian balance of payments with double-entry bookkeeping:

a. A Canadian resident purchases $1,000 of foreign stock, and pays for it by drawing down his bank balances abroad.

b. A Canadian exporter sells merchandise worth $1 million in the United States, and is paid by a US importer with a cheque drawn against Canadian dollar deposits with a bank in Tokyo.

c. A Canadian resident receives an interest payment on a US government bond, and deposits it in her American dollar account at a Canadian chartered bank in Toronto.

3. Suppose the spot foreign exchange rate of the Canadian dollar is $US 1.53, while its 12-month forward rate is $US 1.58. One-year interest rates are 6 percent in Canada and 10 percent in the United States. Are there quick profits to be made from foreign currency arbitrage here? If so, show the sequence of purchases and sales, using $Can. 100,000 as your starting point.

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Solution Summary

This solution helps with Balance Sheets for Bank of Canada transactions, Double-Entry Bookeeping for balance of payment, and Currency Arbitrage Questions.