Reference no: EM133069171

Assume that Bangladesh invests heavily in government and corporate securities of India. In addition, residents of India invest heavily in Bangladesh. Approximately $10 billion worth of investment transactions occur between these two countries each year. The total dollar value of trade transactions per year is about $8 million. This information is expected to also hold in the future.

Because your firm exports goods to India, your job as international cash manager requires you to forecast the value of India's currency (the "rupee") with respect to the taka. Explain how each of the following conditions will affect the value of the rupee, holding other things equal. Then, aggregate all of these impacts to develop an overall forecast of the rupee's movement against the taka.

Questions

a. Bangladeshi inflation has suddenly increased substantially, while Indian inflation remains low.

b. Bangladeshi interest rates have increased substantially, while Indian interest rates remain low. Investors of both countries are attracted to high-interest rates.

c. Bangladeshi income level increased substantially, while Indian income level has remained unchanged.

d. Bangladesh is expected to impose a small tariff on goods imported from India.

e. Combine all expected impacts to develop an overall forecast.