Exam 11: Foreign Exchange

If the Swiss demand for dollars is inelastic, then an appreciation of the dollar against the franc will lead to a greater quantity of francs being supplied to the foreign exchange market to obtain dollars.

If it takes 113.28 yen to buy $1, then it takes $.009624 to buy 1 yen.

A speculator takes a long position by initially buying a currency at a low price and then selling it at a higher price later on.

Movements along the demand schedule for pounds are caused by changes in the pound's exchange rate.

The nominal exchange rate is the

The U.S.demand for pounds is derived from U.S.exports to the United Kingdom, U.K.investments in the United States, and U.K.tourist expenditures in the United States.

Suppose the exchange value of the British pound is $2 per pound while the exchange value of the Swiss franc is 50 cents per pound.The cross-exchange rate between the pound and the franc is

A call option provides an options holder

In recent years, the estimated amount of foreign exchange transactions is about $1 trillion a day.

If the spot price of the Swiss franc is $0.4020 and the 90-day forward franc sells for $0.4026, then the franc is at a 90-day forward discount of $0.0006 or at a 0.2 percent forward discount per annum against the dollar.

In recent years, the largest amount of foreign-exchange trading has involved

Unlike stock or commodity exchanges, the foreign exchange market is NOT an organized structure; it has no centralized meeting place and no formal requirements for participation.

If the Swiss demand for dollars is elastic, then an appreciation of the dollar against the franc will lead to a greater quantity of francs being supplied to the foreign exchange market to obtain dollars.

A put option provides an options holder

Hedging is the process of avoiding or covering a foreign exchange risk.

The ______ is the price at which a foreign currency option can be exercised-that is, the price at which the foreign currency is bought or sold

Exhibit 11.1 Assume the following: (1) the interest rate on six-month treasury bills is 8 percent per annum in the United Kingdom and 4 percent per annum in the United States; (2) today's spot price of the pound is $1.50, while the six-month forward price of the pound is $1.485. -Refer to Exhibit 11.1.By investing in U.K.treasury bills rather than U.S.treasury bills, and NOT covering exchange rate risk, U.S.investors earn an extra return of

When a foreign currency is worth more in the forward market than in the spot market, it is said to be at a discount in the forward market.

Figure 11.3 The Market for the Euro -Refer to Figure 11.3.If the supply curve is represented by S₀, then the equilibrium exchange rate is

If interest rates in the U.K.are higher than those in the United States, then the pound shows a forward discount, which means the forward rate is less than the spot rate.