Homework answers / question archive / 1)What is meant by the foreign exchange market? Where is it located?                   What is meant by the forward market? How does it differ from the spot market? Explain why exchange rate quotations stated in different financial centers tend to be consistent with one another

1)What is meant by the foreign exchange market? Where is it located?                   What is meant by the forward market? How does it differ from the spot market? Explain why exchange rate quotations stated in different financial centers tend to be consistent with one another

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1)What is meant by the foreign exchange market? Where is it located?

 

 

 

 

 

 

 

 

 

2. What is meant by the forward market? How does it differ from the spot market?
3. Explain why exchange rate quotations stated in different financial centers tend to be consistent with one another.
4. What are the benefits of trading in the forward market?

 

5. Give an example of a forward transaction.
6. Explain conceptually the difference between the nominal exchange rate and the real exchange rate.

 

7. Suppose that the dollar/euro exchange rate is 1 Euro =  $1.14 in New York but 1 Euro = $1.15 in Frankfurt. How would a trader be able to profit from this difference?

 

8. Assume Macys (an American retailer) owes 1 million francs to a Swiss watch manufacturer in three month’s time. What is the foreign exchange risk that Macys is subject to? How can Macy hedge against this risk?

 

9. Assume Microsoft anticipates receiving 1 million francs three months from now for exports of software. What is the foreign exchange risk that MIcrosoft is subject to? How can Microsoft hedge against this risk?

 

10. Assume the interest rate on German 3-month Treasury bills is 10% (yearly) and the interest rate on US 3-month Treasury bills is 6% (yearly). Also assume that the spot exchange rate is 1 Euro = $2.  How can a US investor benefit from interest arbitrage? What is the exchange risks involved? How can the investor insure against this risk?

 

11. For the US what are the costs and benefits of an appreciating dollar.