1. Why it is necessary to understand what determines exchange rates?

It is necessary to understand the factors that impact or determine exchange rates in order to avoid the risks due to sudden fluctuations in exchange rates. Such understanding will help to mitigate the negative impact of sudden fluctuations in exchange rate by taking adequate steps in advance. For example, if one knows that political instability can cause currency of a country to weaken, he/she can take adequate steps such as hedging in advance to avoid possible losses due to uncertain political events in any particular country.

Thus, in order to minimize the uncertainties and risks arising in international business transactions, it is extremely important to understand the factors that determines exchange rates.

2. Which are the main differences between a currency forward market and a futures market?

Forward transaction: One way to deal with the Forex risk is to engage in a forward transaction. In this transaction, money does not actually change hands until some agreed upon future date. A buyer and seller agree on an exchange rate for any date in the future, and the transaction occurs on that date, regardless of what the market rates are then. The duration of the trade can be a few days, months or years.

Foreign currency futures are forward transactions with standard contract sizes and maturity dates ? for example, 500,000 British pounds for next November at an agreed rate. Futures are standardized and are usually traded on an exchange created for this purpose. The average contract length is roughly 3 months. Futures contracts are usually inclusive of any interest amounts.

source:
http://en.wikipedia.org/wiki/Currency_market

Unlike in the case of forward contracts, futures can be liquidated any time before maturity.

Futures are always traded on an exchange, whereas forwards always trade over-the-counter
Futures are highly standardized, whereas each forward is unique
The price at which the contract is finally settled is different:
Futures are settled at the settlement price fixed on the last trading date of the contract (i.e. at the end)
Forwards are settled at the forward price agreed on the trade date (i.e. at the start)

source:
http://en.wikipedia.org/wiki/Futures_contract

source: http://www.yourdictionary.com/business_profile/business-tree/forextrading/forex-futures.html

3. Which are the major currencies floating against each other in the global markets?

Major currencies floating against each other:

US Dollar/ British Pound
US Dollar/ Euro
US Dollar/ Yen

Other popular currencies are Australian Dollar, Canadian Dollar, Swiss Francs,etc.

4. Is it a good idea for a country to pay off its foreign debt? Explain.

Yes, it is a good idea for a country, especially the poor ones, to pay off its foreign debt because as long as the poorer countries remain enmeshed in foreign debt, there is little hope that they can develop.

source: http://www.twnside.org.sg/title2/gtrends59.htm

But foreign debt can be a virtue as well. In the case of foreign borrowing, you must be able to translate the higher return into foreign exchange through exports. Provided you do so, foreign debt will cease to be a vice and become a virtue.

DEBT SUCCESS: The briefest look at successful developing countries like South Korea, Malaysia, Thailand and Indonesia ? which have increased living standards dramatically in the 80's and 90's ?shows that their success would have been impossible without the huge foreign debt which they accumulated. The hallmark of a developing country is that it is short of capital, and this constrains its economic growth. Additional capital from abroad, if used well, is essential to accelerate growth.

Consider South Korea, one superstars of the 1980s. Its ratio of foreign debt to GNP in 1980 was 48.7 per cent, peaked at 52.5 per, cent in 1985 and then fell rapidly Malaysia's ratio peaked at 84.4 per cent in 1986 before declining to 51.6 per cent in 1989. Indonesia's ratio shot up from 28 percent in 1980 (when it was seen as a disaster economy) to 59.8 percent in 1989(by which time it was hailed as a roaring success). Thailand's ratio peaked at 45.5 percent in 1985. In most cases, the recent decline in debt was due its replacement by huge flows of direct foreign investment.

Don't jump to the other extreme and conclude that a high debt ratio is necessarily a good thing. Argentina had a ratio of 258 per cent in 1989 but was neck-deep in trouble. The lesson is that foreign borrowing can propel you to great wealth if used efficiently (Korea, Thailand) and can lead to bankruptcy if used badly (Argentina).