Exam 11: Foreign Exchange

The soaring (appreciating) value of the trade-weighted dollar in the early 1980s

The exchange rate is kept the same in all parts of the market by:

The supply schedule of pesos has a negative-sloping region corresponding to the inelastic region on the Mexican demand schedule for foreign currency.

A foreign currency option is an agreement between a holder (corporation) and a writer (commercial bank) giving the holder the right to buy or sell a certain amount of foreign currency at any time through some specified date.

-In the table above,if the exchange rate is equal to $2.00 per pound,there is a ______ and the exchange rate will______.

In the interbank market for foreign exchange,the ____ refers to the price for which a bank is willing to sell a unit of foreign currency.

Concerning the management of foreign exchange risk,some business firms do not hedge at all either because they cannot determine how much money will be coming in from abroad or because they have a deliberate strategy of allowing currencies to balance each other out around the world.

Concerning foreign exchange trading,the bid rate refers to the price that a bank is willing to pay for a unit of foreign currency; the offer rate is the price at which the bank is willing to sell a unit of foreign currency.

The nominal exchange rate is the

Concerning foreign currency trading,an option contract provides the holder the right to buy or sell a fixed amount of currency at a prearranged price within a few days or a couple of years.

If the dollar cost of the U.K.pound is $1.50 and the dollar cost of the Swiss franc is $1,the cross exchange rate between pound and the franc is 0.67 francs per pound.

A speculator engages in a short position by initially selling a currency (that she does not own) at a high price,then buying it back later at a low price.

Suppose that Walmart owes 100 million yen to a Japanese radio manufacturer in three-months' time.To cover itself against the risk of the dollar appreciating against the yen during this period,Walmart could buy 100 million yen in the forward market,at today's forward rate for delivery in three months.

Exhibit 11.1 Assume the following: (1) the interest rate on 6-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 6-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:

Most foreign exchange trading occurs between banks and:

Table 11.4.Forward Exchange Rates -Refer to Table 11.4.On Wednesday,the 30-day forward franc was selling at a:

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 supply curve of British pounds slopes upward because as the dollar _____ American goods become ______ for the British.Therefore,the British purchase ______ American goods and the quantity of pounds supplied increases.

Concerning the foreign exchange market,which of the following is false?

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 -When the exchange rate (dollars per pound) decreases,the

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