Suppose that we are in the early days of the Bretton Woods system, and France has
declared a par value for the French franc at FF6 per dollar.
The allowable fluctuation band
is one percent on either side of par. What is the price ceiling for the dollar in terms of French
francs? What is the price floor? Suppose that France then devalues the franc and sets
a new par at FF8 . What are the new price ceiling and floor?
no
To find the price ceiling and price floor for the dollar in terms of French francs, we need to use the information provided.
In the early days of the Bretton Woods system, France declared a par value for the French franc at FF6 per dollar. The allowable fluctuation band is one percent on either side of par.
To calculate the price ceiling, we add one percent to the par value:
Price Ceiling = Par Value + (Par Value * 1%)
In this case, the par value is FF6 per dollar, so we can calculate the price ceiling as follows:
Price Ceiling = FF6 + (FF6 * 1%) = FF6 + (FF6 * 0.01) = FF6.06
Therefore, the price ceiling for the dollar in terms of French francs is FF6.06.
To calculate the price floor, we subtract one percent from the par value:
Price Floor = Par Value - (Par Value * 1%)
Using the par value of FF6 per dollar, we can calculate the price floor as follows:
Price Floor = FF6 - (FF6 * 1%) = FF6 - (FF6 * 0.01) = FF5.94
So, the price floor for the dollar in terms of French francs is FF5.94.
Now, let's consider the scenario where France devalues the franc and sets a new par value at FF8.
To calculate the new price ceiling and floor, we repeat the same calculation process using the new par value.
New Price Ceiling = New Par Value + (New Par Value * 1%)
Using the new par value of FF8 per dollar:
New Price Ceiling = FF8 + (FF8 * 1%) = FF8 + (FF8 * 0.01) = FF8.08
The new price ceiling for the dollar in terms of French francs is FF8.08.
New Price Floor = New Par Value - (New Par Value * 1%)
Using the new par value of FF8 per dollar:
New Price Floor = FF8 - (FF8 * 1%) = FF8 - (FF8 * 0.01) = FF7.92
The new price floor for the dollar in terms of French francs is FF7.92.