Reference no: EM133072282

While throughout the Western countries, exchange rates were not settling down, especially during October 1992, Royal Bank of Scotland (RBS) borrowed Swiss Franc CHF66 billion from Switzerland when a pound was worth CHF2.78 or US$1.92. On December 14, 1992, RBS sold these Francs in the foreign exchange market at the rate of CHF2.50/£1. On that day, the exchange rate between dollar and pound was $1.78/£1.

-By what percentage had the pound sterling changed (revalued or devalued) in the interim against the Swiss Franc? Against the dollar?

-Given the above spot rates of pound against CHF and US$ on December 14, 1992, suppose, on the same day, the three-month forward rate for the pound was CHF2.10 and US$1.85. Was the pound selling at a premium or discount against CHF and US$? If so, at what percentage the pound was selling at premium or discount against CHF and US$?

-In an environment of extreme volatility, the central bank of a country (e.g., Bank of England) can take different measures to intervene in the foreign exchange market. Define those intervention options/measures. What does the central bank do if the value of domestic currency is very high or very low?