CHAPTER 11FOREIGN EXCHANGE

MULTIPLE CHOICE
1. Assume you are an American exporter and expect to receive 50 pounds sterling at the end of 60 days.
You can remove the risk of loss due to a devaluation of the pound sterling by:
a
.
elling sterling in the for!ard market for 60"day delivery
b
.
#uying sterling no! and selling it at the end of 60 days
c
.
elling the dollar e$uivalent in the for!ard market for 60"day delivery
d
.
%eeping the sterling in #ritain after it is delivered to you
A&: A '(: 1
). *hich of the follo!ing tends to cause the +.. dollar to appreciate in value,
a
.
An increase in +.. prices above foreign prices
b
.
-apid economic gro!th in foreign countries
c
.
A fall in +.. interest rates belo! foreign levels
d
.
An increase in the level of +.. income
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.. /oncerning the covering of exchange market risks""assuming that a depreciation of the domestic
currency is anticipated0 one can say that there is an incentive for:
a
.
1xporters to rush to cover their future needs
b
.
2mporters to rush to cover their future needs
c
.
#oth exporters and importers to rush to cover their future needs
d
.
&either exporters nor importers to rush to cover their future needs
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3. *hen short"term interest rates become lo!er in (okyo than in &e! York0 interest arbitrage operations
!ill most likely result in a:
a
.
2ncrease in the spot price of the yen
b
.
2ncrease in the for!ard price of the dollar
c ale of dollars in the for!ard market
.
d
.
'urchase of yen in the spot market
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5. An appreciation in the value of the +.. dollar against the #ritish pound !ould tend to:
a
.
4iscourage the #ritish from buying American goods
b
.
4iscourage Americans from buying #ritish goods
c
.
2ncrease the number of dollars that could be bought !ith a pound
d
.
4iscourage +.. tourists from traveling to #ritain
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6. /oncerning the foreign exchange market0 one can best say that:
a
.
(here is a spot market for virtually every currency in the !orld
b
.
(he market is highly centrali5ed like the stock exchange
c
.
6ost foreign exchange payments are made !ith bank notes
d
.
(he values of the for!ard and spot rates are al!ays in agreement
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7. uppose researchers discover that !iss beer causes cancer !hen given in large amounts to #ritish
mice. (his finding !ould likely result in a 8an9:
a
.
2ncrease in the demand for !iss francs
b
.
4ecrease in the demand for !iss francs
c
.
2ncrease in the supply of !iss francs
d
.
4ecrease in the supply of !iss francs
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:. uppose that real incomes increase more rapidly in the +nited tates than in 6exico. 2n the +nited
tates0 this situation !ould likely result in a 8an9:
a
.
2ncrease in the demand for pesos
b 4ecrease in the demand for pesos
.
c
.
2ncrease in the supply of pesos
d
.
4ecrease in the supply of pesos
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;. A depreciation of the dollar refers to:
a
.
A fall in the dollar price of foreign currency
b
.
An increase in the dollar price of foreign currency
c
.
A loss of foreign"exchange reserves for the +..
d
.
An intervention in the international money market
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10. 2f /anadian speculators believed the !iss franc !as going to appreciate against the +.. dollar0 they
!ould:
a
.
'urchase /anadian dollars
b
.
'urchase +.. dollars
c
.
'urchase !iss francs
d
.
ell !iss francs
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11. A ma<or difference bet!een the spot market and the for!ard market is that the spot market deals !ith:
a
.
(he immediate delivery of currencies
b
.
(he merchandise trade account
c
.
/urrencies traded for future delivery
d
.
=edging of international currency risks
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1). (he exchange rate is kept the same in all parts of the market by:
a
.
>or!ard cover
b
.
=edging
c
.
1xchange speculation
d
.
1xchange arbitrage
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1.. 2f you have a commitment to pay a friend in #ritain 10000 pounds in .0 days0 you could remove the
risk of loss due to the appreciation of the pound by:
a
.
#uying dollars in the for!ard market for delivery in .0 days
b
.
elling dollars in the for!ard market for delivery in .0 days
c
.
#uying the pounds in the for!ard market for delivery in .0 days
d
.
elling the pounds in the for!ard market for delivery in .0 days
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13. An increase in the dollar price of other currencies tends to cause:
a
.
+.. goods to be cheaper than foreign goods
b
.
+.. goods to be more expensive than foreign goods
c
.
>oreign goods to be more expensive to residents of foreign nations
d
.
>oreign goods to be cheaper to residents of the +nited tates
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15. (he balance on merchandise trade:
a
.
6ust be negative
b
.
6ust be positive
c
.
6ust be 5ero
d
.
6ay be negative0 positive0 or 5ero
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16. *hich of the follo!ing !ould not induce the +.. demand curve for foreign exchange to shift
back!ard to the left,
a
.
*orsening American tastes for goods produced overseas
b
.
2ncreasing interest rates in the +.. compared to those overseas
c
.
A fall in the level of +.. income
d
.
A depreciation in the +.. dollar against foreign currencies
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17. A +.. export company scheduled to receive 1 million pounds six months from today can hedge its
foreign exchange risk by:
a
.
#uying today 1 million pounds in the for!ard market for delivery in six months
b
.
#uying 1 million pounds in the spot market for delivery in six months
c
.
elling 1 million pounds in the spot market for delivery in six months
d
.
elling today 1 million pounds in the for!ard market for delivery in six months
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1:. ?ver time0 a depreciation in the value of a nation@s currency in the foreign exchange market !ill result
in:
a
.
1xports rising and imports falling
b
.
2mports rising and exports falling
c
.
#oth imports and exports rising
d
.
#oth imports and exports falling
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1;. Arain shortages in countries that buy large amounts of grain from the +nited tates !ould increase the
demand for American grain and:
a
.
-educe the demand for dollars
b
.
2ncrease the demand for dollars
c
.
-educe the supply of dollars
d
.
2ncrease the supply of dollars
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)0. uppose the exchange rate bet!een the Bapanese yen and the +.. dollar is 100 yen per dollar. A
Bapanese stereo !ith a price of 600000 yen !ill cost:
a
.
C60
b
.
C600
c
.
C6000
d
.
&one of the above
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)1. (he supply of foreign currency may be:
a
.
+p!ard"sloping
b
.
#ack!ard"sloping
c
.
Dertical
d
.
&one of the above
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)). uppose that a !iss !atch that costs 300 francs in !it5erland costs C)00 in the +nited tates. (he
exchange rate bet!een the franc and the dollar is:
a
.
) francs per dollar
b
.
1 franc per dollar
c
.
C) per franc
d
.
C. per franc
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).. 2n the early 1;:0s0 the >ederal -eserve pursued a tight monetary policy. All else being e$ual0 the
impact of that policy !as to EEEE interest rates in the +nited tates relative to those in 1urope and
cause the dollar to EEEE against 1uropean currencies.
a
.
4ecrease0 depreciate
b
.
4ecrease0 appreciate
c
.
2ncrease0 depreciate
d
.
2ncrease0 appreciate
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)3. +nder a system of floating exchange rates0 the !iss franc !ould depreciate in value if !hich of the
follo!ing occurs,
a
.
'rice inflation in >rance
b
.
An increase in +.. real income
c
.
A decrease in the !iss money supply
d
.
>alling interest rates in !it5erland
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)5. A depreciation of the dollar !ill have its most pronounced impact on imports if the demand for imports
is:
a
.
/onstant
b
.
2nelastic
c
.
1lastic
d
.
+nitary elastic
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)6. 4uring the era of dollar appreciation0 from 1;:1 to 1;:50 a main reason !hy the dollar did not fall in
value !as:
a
.
>lo!s of foreign investment into the +nited tates
b
.
-ising price inflation in the +nited tates
c
.
A substantial decrease in +.. imports
d
.
A substantial increase in +.. exports
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)7. *hich financial instrument provides a buyer the right to purchase or sell a fixed amount of currency at
a prearranged price0 !ithin a fe! days to a couple of years,
a
.
Fetter of credit
b
.
>oreign currency option
c
.
/able transfer
d
.
#ill of exchange
A&: # '(: 1
):. Aiven the foreign currency market for the !iss franc0 the supply of francs slopes up!ard0 because as
the dollar price of the franc rises:
a
.
America@s demand for !iss merchandise rises
b
.
America@s demand for !iss merchandise falls
c
.
!it5erland@s demand for American merchandise rises
d
.
!it5erland@s demand for American merchandise falls
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);. 2n a supply"and"demand diagram for Bapanese yen0 !ith the exchange rate in dollars per yen on the
vertical axis0 the demand schedule for yen is dra!n sloping:
a
.
+p!ard
b
.
Dertical
c
.
4o!n!ard
d
.
=ori5ontal
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.0. uppose there occurs an increase in the /anadian demand for Bapanese computers. (his results in:
a
.
An increase in the demand for yen
b
.
A decrease in the demand for yen
c
.
An increase in the supply of yen to /anada
d
.
A decrease in the supply of yen to /anada
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Table 11.1 gives the exchange rate quotations for the U.S. dollar and the British pound.
Table 11.1. Foreign Excange !"o#a#ion$
+.. 4ollar /urrency 'er
1$uivalent +.. 4ollar
(uesday 6onday (uesday 6onday
%ri#ain 8'ound9 1.3)70 1.3.;0 .700: .6;3;
.0"day >or!ard 1.3)11 1.3... .70.7 .6;77
60"day >or!ard 1.30;0 1.3))0 .70;7 .70.)
1:0"day >or!ard 1..;.0 1.3070 .717; .7107
.1. /onsider (able 11.1. 2f one !ere to buy pounds for immediate delivery0 on (uesday the dollar cost of
each pound !ould be:
a
.
C0.700:
b
.
C0.70.7
c
.
C1.3)11
d
.
C1.3)70
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.). /onsider (able 11.1. 2f one !ere to sell dollars for immediate delivery0 on (uesday the pound cost of
each dollar !ould be:
a
.
.700: pounds per dollar
b
.
.70.7 pounds per dollar
c
.
1.3)70 pounds per dollar
d
.
1.3)11 pounds per dollar
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... /onsider (able 11.1. /omparing (uesday to the previous 6onday0 by (uesday the dollar had:
a
.
4epreciated against the pound
b
.
Appreciated against the pound
c
.
&ot changed against the pound
d
.
&one of the above
A&: # '(: 1
.3. /onsider (able 11.1. /oncerning the (uesday $uotations: compared to the cost of buying 100 pounds
on the spot market0 if 100 pounds !ere bought for future delivery in 1:0 days the dollar cost of the
pounds !ould be:
a
.
C..30 higher
b
.
C..30 lo!er
c
.
C6.:0 higher
d
.
C6.:0 lo!er
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.5. *hich method of trading currencies involves the conversion of one currency into another at one point
in time !ith an agreement to reconvert it back to the original currency at some point in the future,
a
.
>or!ard transaction
b
.
>utures transaction
c
.
pot transaction
d
.
!ap transaction
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.6. 6ost foreign exchange trading occurs bet!een banks and:
a
.
&ational governments
b
.
?ther banks
c
.
/orporations
d
.
=ousehold investors
A&: # '(: 1
.7. (he most important 8in terms of dollar value9 type of foreign exchange transaction by +.. banks is
the:
a
.
pot transaction
b
.
>or!ard transaction
c
.
!ap transaction
d
.
?ption transaction
A&: A '(: 1
.:. 2n the interbank market for foreign exchange0 the EEEE refers to the price that a bank is !illing to pay
for a unit of foreign currency.
a
.
?ffer rate
b
.
#id rate
c
.
pread rate
d
.
(ransaction rate
A&: # '(: 1
.;. 2n the interbank market for foreign exchange0 the EEEE refers to the price for !hich a bank is !illing to
sell a unit of foreign currency.
a
.
?ffer rate
b
.
?ption rate
c
.
>utures rate
d
.
#id rate
A&: A '(: 1
30. 2n the interbank market for foreign exchange0 the EEEE refers to the difference bet!een the offer rate
and the bid rate.
a
.
/ross rate
b
.
?ption
c
.
Arbitrage
d
.
pread
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31. A corporation dealing in foreign exchange may desire to obtain an exchange $uote bet!een the pound
and franc0 !hose values are both expressed relative to the dollar. EEEE are used to determine such a
relationship.
a
.
pot exchange rates
b >or!ard exchange rates
.
c
.
/ross exchange rates
d
.
?ption exchange rates
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3). uppose the exchange value of the #ritish pound is C) per pound !hile the exchange value of the
!iss franc is 50 cents per pound. (he cross exchange rate bet!een the pound and the franc is:
a
.
1 franc per pound
b
.
) francs per pound
c
.
. francs per pound
d
.
3 francs per pound
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Exibi# 11.1
Assume the follo!ing: 819 the interest rate on 6"month treasury bills is : percent per annum in the
+nited %ingdom and 3 percent per annum in the +nited tatesG 8)9 today@s spot price of the pound is
C1.50 !hile the 6"month for!ard price of the pound is C1.3:5.
3.. -efer to 1xhibit 11.1. #y investing in +.%. treasury bills rather than +.. treasury bills0 and not
covering exchange rate risk0 +.. investors earn an extra return of:
a
.
3 percent per year0 1 percent for the 6 months
b
.
3 percent per year0 ) percent for the 6 months
c
.
) percent per year0 0.5 percent for the 6 months
d
.
) percent per year0 1 percent for the 6 months
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33. -efer to 1xhibit 11.1. 2f +.. investors cover their exchange rate risk0 the extra return for the 6 months
on the +.%. treasury bills is:
a
.
1.0 percent
b
.
1.5 percent
c
.
).0 percent
d
.
).5 percent
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35. -efer to 1xhibit 11.1. 2f the price of the 6"month for!ard pound !ere to EEEE0 +.. investors !ould no
longer earn an extra return by shifting funds to the +nited %ingdom.
a
.
-ise to C1.5)
b
.
-ise to C1.5.
c
.
>all to C1.3:
d
.
>all to C1.37
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36. Assume that you are the /hase 6anhattan #ank of the +nited tates0 and you have 1 million !iss
francs in your vault that you !ill need to use in .0 days. 6oreover0 you need 5000000 #ritish pounds
for the next .0 days. You arrange to loan your francs to #arclays #ank of Fondon for .0 days in
exchange for 5000000 pounds today0 and reverse the transaction at the end of .0 days. You have <ust
arranged a:
a
.
>or!ard contract
b
.
>utures contract
c
.
pot contract
d
.
/urrency s!ap
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Figure 11.1 illustrates the supply and demand schedules for the Swiss franc. ssume that exchange
rates are flexible.
Fig"re 11.1. &"''l( an) *e+an) &ce)"le$ o, Franc$
37. -efer to >igure 11.1. At the e$uilibrium exchange rate of EEEE per franc0 EEEE francs !ill be
purchased at a total dollar cost of EEEE.
a
.
C.500 5 million0 C).5 million
b
.
C.500 5 million0 C1.5 million
c
.
C.700 . million0 C).1 million
d
.
C.700 7 million0 C3.; million
A&: A '(: 1
3:. -efer to >igure 11.1. uppose the exchange rate is C.70 per franc. At this exchange rate there is an
EEEE of francs !hich leads to a EEEE in the dollar price of the franc0 a 8an9 EEEE in the $uantity of
francs supplied0 and a 8an9 EEEE in the $uantity of francs demanded.
a
.
1xcess demand0 rise0 increase0 decrease
b
.
1xcess demand0 rise0 decrease0 increase
c
.
1xcess supply0 fall0 decrease0 increase
d
.
1xcess supply0 fall0 increase0 decrease
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3;. -efer to >igure 11.1. uppose the exchange rate is C..0 per franc. At this exchange rate there is an
EEEE of francs !hich leads to a EEEE in the dollar price of the franc0 a 8an9 EEEE in the $uantity of
francs supplied0 and a 8an9 EEEE in the $uantity of francs demanded.
a 1xcess demand0 rise0 increase0 decrease
.
b
.
1xcess demand0 rise0 decrease0 increase
c
.
1xcess supply0 fall0 decrease0 increase
d
.
1xcess supply0 fall0 increase0 decrease
A&: A '(: 1
50. -efer to >igure 11.1. uppose the exchange rate is C.70 per franc. >ree"market forces !ould lead to a
8an9 EEEE of the dollar against the franc and a 8an9 EEEE in +.. international competitiveness.
a
.
4epreciation0 improvement
b
.
4epreciation0 !orsening
c
.
Appreciation0 improvement
d
.
Appreciation0 !orsening
A&: 4 '(: 1
51. -efer to >igure 11.1. uppose the exchange rate is C..0 per franc. >ree"market forces !ould lead to a
8an9 EEEE of the dollar against the franc and a 8an9 EEEE in +.. international competitiveness:
a
.
4epreciation0 improvement
b
.
4epreciation0 !orsening
c
.
Appreciation0 improvement
d
.
Appreciation0 !orsening
A&: A '(: 1
The figure below illustrates the mar!et for Swiss francs in a world of mar!et"determined exchange
rates. ssume the equilibrium exchange rate is #$.% per franc& given by the intersection of schedules S$
and '$.
Fig"re 11.-. Mar.e# ,or Franc$
5). -efer to >igure 11.). A shift in the demand for francs from 40 to 41 or a shift in the supply of francs
from 0 to )0 !ould result in a 8an9:
a
.
4epreciation in the dollar against the franc
b
.
Appreciation in the dollar against the franc
c
.
+nchanged dollarHfranc exchange rate
d
.
&one of the above
A&: A '(: 1
5.. -efer to >igure 11.). A shift in the demand for francs from 40 to 4)0 or a shift in the supply of francs
from 0 to 10 !ould result in a 8an9:
a
.
4epreciation in the dollar against the franc
b
.
Appreciation in the dollar against the franc
c
.
&o change in the dollarHfranc exchange rate
d
.
&one of the above
A&: # '(: 1
53. A 8An9 EEEE is an arrangement by !hich t!o parties exchange one currency for another and agree that
the exchange !ill be reversed at a stipulated date in the future:
a
.
Arbitrage
b
.
!ap
c
.
?ption
d
.
=edge
A&: # '(: 1
Table 11.-. &"''l( an) *e+an) o, %ri#i$ Po"n)$
Iuantity 4ollars Iuantity
of 'ounds per of 'ounds
upplied 'ound 4emanded
10000 ).00 )00
:00 1.:0 300
600 1.60 600
300 1.30 :00
)00 1.)0 10000
55. -efer to (able 11.). (he e$uilibrium exchange rate e$uals:
a
.
C1.)0 per pound
b
.
C1.30 per pound
c
.
C1.60 per pound
d
.
C1.:0 per pound
A&: / '(: 1
56. -efer to (able 11.). At the exchange rate of C1.30 per pound0 there is an EEEE for pounds. (his
imbalance causes EEEE in the price of the pound0 !hich leads to EEEE in the $uantity of pounds
supplied and EEEE in the $uantity of pounds demanded.
a
.
1xcess supply0 a decrease0 an increase0 a decrease
b
.
1xcess supply0 an increase0 a decrease0 an increase
c
.
1xcess demand0 an increase0 an increase0 a decrease
d
.
1xcess demand0 an increase0 a decrease0 an increase
A&: / '(: 1
57. -efer to (able 11.). At the exchange rate of C1.:0 per pound0 there is an EEEE for pounds. (his
imbalance causes EEEE in the price of the pound0 !hich leads to EEEE in the $uantity of pounds
supplied and EEEE in the $uantity of pounds demanded.
a
.
1xcess supply0 a decrease0 a decrease0 an increase
b
.
1xcess supply0 an increase0 a decrease0 an increase
c
.
1xcess demand0 an increase0 an increase0 a decrease
d
.
1xcess demand0 an increase0 a decrease0 an increase
A&: A '(: 1
Table 11./. 0e( C"rrenc( Cro$$ Ra#e$
*ollar E"ro Po"n) &1i$$ Franc
/anada 1.5.)6 1.3300 ).).6) 0.;7;0
Bapan 1)3.3: 116.;6 1:1.6. 7;.515
6exico ;.7310 ;.15)6 13.)1. 6.))).
!it5erland 1.5655 1.370; ).):3) ..........
+.%. .6:530 .6330 .......... .3.7:
1uro 1.063.0 .......... 1.55); .67;:3
+.. .......... .;.;6 1.35;1 .6.:77
5:. -eferring to (able 11..0 the cross exchange rate bet!een the euro and !iss franc is approximately:
a
.
.6: euros per franc
b
.
.6: francs per euro
c
.
.63 euros per franc
d
.
.63 francs per euro
A&: A '(: 1
5;. -eferring to (able 11..0 the yen cost of purchasing 100 #ritish pounds is roughly:
a
.
1:0000 yen
b
.
1;0000 yen
c
.
)00000 yen
d
.
)10000 yen
A&: A '(: 1
Table 11.2. For1ar) Excange Ra#e$
+.. 4ollar 1$uivalent
*ednesday (uesday
&1i#3erlan) 8>ranc9 .65;: .65;0
.0"day >or!ard .65;) .65:5
;0"day >or!ard .65:5 .657:
1:0"day >or!ard .6577 .657)
60. -efer to (able 11.3. ?n *ednesday0 the .0"day for!ard franc !as selling at a:
a
.
1 percent premium per annum against the dollar
b
.
) percent premium per annum against the dollar
c
.
1 percent discount per annum against the dollar
d
.
) percent discount per annum against the dollar
A&: / '(: 1
61. -efer to (able 11.3. ?n *ednesday0 the ;0"day for!ard franc !as selling at a:
a
.
0.: percent premium per annum against the dollar
b
.
1.6 percent premium per annum against the dollar
c
.
0.: percent discount per annum against the dollar
d
.
1.6 percent discount per annum against the dollar
A&: / '(: 1
6). -efer to (able 11.3. ?n *ednesday0 the 1:0"day for!ard franc !as selling at a:
a
.
0.6 percent premium per annum against the dollar
b
.
1.6 percent premium per annum against the dollar
c
.
0.6 percent discount per annum against the dollar
d
.
1.6 percent discount per annum against the dollar
A&: / '(: 1
6.. -efer to (able 11.3. /omparing the franc@s for!ard rates against the franc@s spot rate0 the exchange
market@s consensus is that over the period of a for!ard contract0 the franc@s spot rate !ill:
a
.
4epreciate against the dollar
b
.
Appreciate against the dollar
c
.
-emain constant against the dollar
d
.
&one of the above
A&: A '(: 1
63. (he offer rate
a
.
2s the price at !hich the bank is !illing to sell a unit of foreign currency
b
.
2s the price that the bank is !illing to pay for a unit of foreign currency
c
.
2s synonymous !ith the spread rate
d
.
&one of the above
A&: A '(: 1
65. *hen the dollar depreciates
a
.
+.. exporters tend to sell more goods in foreign markets
b
.
+.. consumers travel abroad more cheaply
c
.
6ore foreign tourists can afford to visit the +nited tates
d
.
both a and c
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66. *hen the dollar gets stronger
a
.
+.. firms become more competitive in international market
b
.
>oreign tourists travel in the +.. at a higher cost
c
.
+.. inflation increases
d
.
+.. consumers face higher prices on foreign goods
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TRUE4FAL&E
1. imilar to stock and commodity exchanges0 the foreign exchange market is an organi5ed structure !ith
a central meeting place and formal licensing re$uirements.
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). 6ost foreign exchange transactions are conducted bet!een commercial banks and household
customers.
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.. >oreign"exchange brokers help commercial banks carry out foreign exchange trading and maintain
desired balances of foreign exchange.
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3. A person needing foreign exchange immediately !ould purchase it on the spot market.
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5. 6ost foreign exchange trading is carried out in the for!ard market.
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6. !ap transactions among commercial banks involve the conversion of one currency to another at one
point !ith an agreement to reconvert it back into the original currency at some point in the future.
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7. (he bid rate refers to the price at !hich a bank is !illing to sell a unit of foreign currencyG the offer
rate is the price at !hich a bank is !illing to buy a unit of foreign currency.
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:. A commercial bank profits from foreign"exchange trading !hen its bid rate exceeds its offer rate.
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;. (he JspreadJ is a bank@s profit margin on foreign exchange trading and e$uals the difference bet!een
the bid rate and the offer rate.
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10. 2f /itibank $uoted bid and offer rates for the !iss franc at C.3:50HC.3:530 the bank !ould be prepared
to buy0 say0 1 million francs for C3:50000 and sell them for C3:50300.
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11. 2f /hase 6anhattan #ank $uotes bid and offer rates for the !iss franc at C.5)50HC.5)600 the bank
!ould reali5e profits of C10000 on the purchase and sale of 1 million francs.
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1). 2f a /itibank dealer expects the !iss franc to appreciate against the +.. dollar0 she !ill attempt to
lo!er both bid and offer rates for the franc0 attempting to persuade other dealers to buy francs from
/itibank and dissuade other dealers from selling francs to /itibank.
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1.. 2f a /itibank dealer expects the !iss franc to depreciate in the future0 he !ill lo!er bid and offer rates
for the franc in order to discourage other dealers from selling francs to /itibank and persuade other
dealers to buy francs from /itibank.
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13. 2f it takes C0.1:533 to purchase 1 >rench franc0 it takes 5..;)6 francs to purchase C1.
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15. 2f it takes 11..): yen to buy C10 it takes C.00;6)3 to buy 1 yen.
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16. 2f it takes C1.5515 to buy 1 pound and C0.6:35 to buy 1 franc0 it takes ).)7 francs to buy 1 pound.
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17. J>uturesJ currency contracts are issued by commercial banks and are tailored in si5e to the needs of
the exporter or importer0 !hile Jfor!ardJ currency contracts are issued by the 2nternational 6onetary
6arket in standardi5ed round lots.
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1:. A foreign currency option is an agreement bet!een a holder 8corporation9 and a !riter 8commercial
bank9 giving the holder the right to buy or sell a certain amount of foreign currency at any time
through some specified date.
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1;. A JcallJ option gives Aeneral 6otors the right to sell pounds at a specified price0 !hile a put option
gives Aeneral 6otors the right to buy pounds at a specified price.
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)0. (he demand for foreign exchange is derived from credit transactions on the balance of payments.
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)1. (he +.. demand for pounds is derived from +.. exports to the +nited %ingdom0 +.%. investments in
the +nited tates0 and +.%. tourist expenditures in the +nited tates.
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)). As the dollar@s exchange value appreciates against the pound0 +.. residents tend to import more
#ritish goods and thus demand more pounds.
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).. As the dollar depreciates against the peso0 +.. residents tend to import more 6exican goods and thus
demand more pesos.
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)3. (he supply of francs is derived from the desire of the !iss to purchase Aerman goods0 make
investments in Aermany0 repay debts to Aerman lenders0 and extend transfer payments to Aerman
residents.
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)5. (he demand schedule for !iss francs is al!ays do!nsloping !hile the supply schedule of francs is
al!ays upsloping.
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)6. (he supply schedule of yen has a positive"sloping region !hich corresponds to the inelastic region on
the Bapanese demand schedule for foreign currency.
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)7. (he supply schedule of pesos has a negative"sloping region corresponding to the inelastic region on
the 6exican demand schedule for foreign currency.
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):. 2f the !iss demand for dollars is elastic0 a depreciation of the dollar against the franc !ill lead to a
greater $uantity of francs being supplied to the foreign exchange market to obtain dollars.
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);. 2f the !iss demand for dollars is inelastic0 an appreciation of the dollar against the franc !ill lead to a
greater $uantity of francs being supplied to the foreign exchange market to obtain dollars.
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.0. 2f the !iss demand for dollars is elastic0 an appreciation of the dollar against the franc !ill lead to a
greater $uantity of francs being supplied to the foreign exchange market to obtain dollars.
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.1. 2f the !iss demand for dollars is inelastic0 a depreciation of the dollar against the franc !ill lead to a
greater $uantity of francs being supplied to the foreign exchange market to obtain dollars.
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.). 6ovements along the demand schedule for pounds are caused by changes in the pound@s exchange
rate.
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... Aiven an up!ard"sloping supply schedule of pounds and a do!n!ard"sloping demand schedule for
pounds0 an increase in the demand schedule causes an appreciation of the dollar against the pound.
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.3. Aiven an up!ard"sloping supply schedule of pounds and a do!n!ard"sloping demand schedule for
pounds0 a decrease in the demand schedule causes an appreciation of the dollar against the pound.
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.5. Aiven an up!ard"sloping supply schedule of pounds and a do!n!ard"sloping demand schedule for
pounds0 an increase in the supply schedule causes an appreciation of the dollar against the pound.
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.6. Aiven an up!ard"sloping supply schedule of pounds and a do!n!ard"sloping demand schedule for
pounds0 a decrease in the supply schedule causes an appreciation of the dollar against the pound.
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.7. (he trade"!eighted dollar is the !eighted average of the exchange rates bet!een the dollar and the
most important industrial"country trading partners of the +nited tates.
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.:. 2f the trade"!eighted dollar moves from an index value to 100 to 1100 the dollar depreciates by 10
percent against the trade"!eighted averages of the exchange rates of the ma<or trading partners of the
+nited tates.
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.;. An increase in the trade"!eighted value of the dollar indicates a dollar appreciation relative to the
currencies of its ma<or trading partners and a !orsening of +.. international competitiveness.
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30. *ith arbitrage0 a trader attempts to purchase a foreign currency at a lo! price and0 at a later date0 resell
the currency at a higher price in order to make a profit.
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31. Arbitrage results in a riskless profit since a trader purchases a currency at a lo! price and
simultaneously resells it at a higher price.
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3). 2f the exchange rate is C0.01 per yen in &e! York and C0.015 per yen in (okyo0 an arbitrager could
profit by buying yen in (okyo and simultaneously sell them in &e! York.
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3.. /urrency arbitrage tends to result in identical yenHdollar exchange rates in &e! York and in (okyo.
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33. 2n the for!ard market0 the exchange rate is agreed on at the time of the currency contract0 but payment
is not made until the future delivery of the currency actually takes place.
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35. 2f the spot price of the !iss franc is C0.30)0 and the ;0"day for!ard franc sells for C0.30)60 the franc
is at a ;0"day for!ard discount of C0.00060 or at a 0.) percent for!ard discount per annum against the
dollar.
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36. uppose that ears o!es 1 million yen to a Bapanese electronics manufacturer in . months. 2t could
hedge against the risk of a depreciation of the dollar against the yen by contracting to purchase 1
million yen in the for!ard market0 at today@s for!ard rate0 for delivery in . months.
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37. Assume that #oeing anticipates receiving )0 million yen in . months from exports of <umbo <ets to a
Bapanese airline. (he firm could hedge against the risk of a depreciation of the dollar against the yen
by contracting to sell its expected yen proceeds for dollars in the for!ard market at today@s for!ard
rate.
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3:. A +.. investor@s extra rate of return on an investment in >rance0 as compared to the +nited tates0
e$uals the interest"rate differential ad<usted for any change in the dollarHfranc exchange rate.
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3;. A currency speculator@s goal is to buy a currency at a lo! price and immediately resell it at a higher
price0 thus reali5ing a riskless profit.
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50. tabili5ing speculation reinforces market forces by intensifying an appreciation or a depreciation in a
currency@s exchange value.
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&HORT AN&5ER
1. *hat foreign exchange transactions do banks typically engage in,
A&:
#anks typically engage in spot0 for!ard0 and s!ap transactions.
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). =o! is the e$uilibrium rate of exchange determined,
A&:
(he e$uilibrium rate of exchange in a free market is determined by the intersection of the supply and
demand schedules of foreign exchange.
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E&&A6
1. 2s it possible to trade foreign exchange in the futures market, =o! does such trading differ from the
for!ard market,
A&:
Yes. 2n the futures market0 contracting parties agree to future exchanges of currencies and set
applicable exchange rates in advance. (he futures market is distinguished from the for!ard market in
that only a limited number of leading currencies are tradedG moreover0 trading takes place in a
standardi5ed contract amount and in a specific geographic location.
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). *here are foreign currency options traded,
A&:
>oreign"currency options are traded in a variety of currencies in 1urope and the +nited tates. (he
bank market for foreign"currency options consists of large +.. banks that !rite options for their
corporate customers. 2n addition0 the Amsterdam0 6ontreal0 and 'hiladelphia exchanges provide
centrali5ed trading floors devoted to foreign"currency"option trading.
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