Exam 11: Foreign Exchange

With arbitrage,a trader attempts to purchase a foreign currency at a low price and,at a later date,resell the currency at a higher price in order to make a profit.

In a supply-and-demand diagram for Japanese yen,with the exchange rate in dollars per yen on the vertical axis,the demand schedule for yen is drawn sloping:

The real exchange rate differs from the nominal exchange rate in that the real exchange rate

An appreciation in the value of the U.S.dollar against the British pound would tend to:

As the dollar's exchange value appreciates against the pound,U.S.residents tend to import more British goods and thus demand more pounds.

If the Swiss demand for dollars is elastic,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 currency speculator's goal is to buy a currency at a low price and immediately resell it at a higher price,thus realizing a riskless profit.

If the trade-weighted dollar moves from an index value to 100 to 110,the dollar depreciates by 10 percent against the trade-weighted averages of the exchange rates of the major trading partners of the United States.

The figure below illustrates the market for Swiss francs in a world of market-determined exchange rates.Assume the equilibrium exchange rate is $0.5 per franc,given by the intersection of schedules S0 and D0. Figure 11.2.Market for Francs -Refer to Figure 11.2.A shift in the demand for francs from D0 to D2,or a shift in the supply of francs from S0 to S1,would result in a (an):

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

When conducting foreign exchange trading,commercial banks like Bank of America offer forward contracts.The size of these contracts can be tailored to the needs of an importer or importer and their date of delivery is negotiable.

Given an upward-sloping supply schedule of pounds and a downward-sloping demand schedule for pounds,an increase in the demand schedule causes an appreciation of the dollar against the pound.

If Canadian speculators believed the Swiss franc was going to appreciate against the U.S.dollar,they would:

Answer the next question on the basis of the table below that shows the exchange rate between various currencies and the U.S.dollar December 2015 Exchange Rate December 2016 Exchange Rate Currency (dollars per unit of foreign currency) (dollars per unit of foreign currency) Mexican peso $0.07 $0.09 Swiss franc $1.10 $1.05 Japanese yen $0.010 $0.012 British pound $1.64 $1.58 -The demand curve for British pounds slopes downward because as the dollar ______ British goods become ______ for Americans.Therefore,Americans purchase ______ British goods and the quantity of pounds demanded decreases.

A major difference between the spot market and the forward market is that the spot market deals with:

Given an upward-sloping supply schedule of pounds and a downward-sloping demand schedule for pounds,a decrease in the demand schedule causes an appreciation of the dollar against the pound.

Figure 11.1 illustrates the supply and demand schedules for the Swiss franc.Assume that exchange rates are flexible. Figure 11.1.Supply and Demand Schedules of Francs -Refer to Figure 11.1.Suppose the exchange rate is $.30 per franc.At this exchange rate there is an ____ of francs which leads to a ____ in the dollar price of the franc,a (an) ____ in the quantity of francs supplied,and a (an) ____ in the quantity of francs demanded.

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

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.

Over time,a depreciation in the value of a nation's currency in the foreign exchange market will result in: