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Exam 10: The Foreign Exchange Market

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Question 1

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What is countertrade? Why would a firm engage in countertrade?

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Countertrade refers to a range of barter...

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Question 2

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Compare and contrast currencies that are freely convertible,externally convertible,and nonconvertible.

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A country's currency is said to be freel...

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Explain the notion of economic exposure.How can economic exposure be minimized?

If the spot rate is $1 = ¥120,and the 30-day forward rate is $1 = ¥130,the dollar is selling at a discount in the forward market.

What are the two main functions of the foreign exchange market?

Assume that the interest rate on borrowings in Japan is 1 percent,while the interest rate on deposits in Australian banks is 5 percent.A trader borrows in yen and then converts the money into Australian dollars and deposits it in an Australian bank to make a 4 percent margin.Which type of trade is this an example of?

What is a currency swap?

_____ is most likely to occur when the value of the domestic currency is depreciating rapidly because of hyperinflation or when a country's economic prospects are shaky in other respects.

When a tourist goes to a bank in a foreign country to convert money into the local currency,the exchange rate used is the forward rate.

If the demand for dollars outstrips its supply and if the supply of Japanese yen is greater than the demand for it,what will happen?

The Fisher Effect states that a country's "real" rate of interest is the sum of the "nominal" interest rate and the expected rate of inflation over the period for which the funds are to be lent.

When two parties agree to exchange currency and execute the deal at some specific time in the future,a forward exchange occurs.

Carry trade is non-speculative in nature.

Currency speculation typically involves the long-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates.

Assume that the yen/dollar exchange rate quoted in Tokyo at 3:00 p.m.is ¥120 = $1,and the yen/dollar exchange rate quoted in New York at the same time is ¥123 = $1.A dealer in New York uses dollars to purchase yen and then immediately sells the yen to buy dollars in Tokyo,thereby making a profit.The dealer has engaged in a(n) :

Assume that the current exchange rate is €1 = $1.50.If you exchange 1,000 euros for dollars,you will receive _____.

Discuss the nature of the foreign exchange market.How fast has it been growing? Where are the most important trading centers?

The _____ suggests that given relatively efficient markets,the price of a "basket of goods" should be roughly equivalent in each country.

_____ is the impact of short-run currency exchange rates changes on the reported financial statements of a company.

Where is the foreign exchange market located? What is the nature of the market? Is the market growing or shrinking on a global basis?