Binghamton University - IBUS 311

Chapter 10

1)The foreign exchange market is a market for converting the currency of one country into that of another country.

2. Currency fluctuations can make seemingly profitable trade and investment deals unprofitable and vice versa.

3. The rate at which one currency is converted into another is known as the fluctuation rate.

4. The risk that arises from volatile changes in exchange rates is known as foreign exchange risk.

5. Currency speculation typically involves the long-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates.

6. Carry trade is non-speculative in nature.

7. When a tourist goes to a bank in a foreign country to convert money into the local currency, the exchange rate used is the forward rate.

8. The value of a currency is determined by the interaction between the demand and supply of that currency relative to the demand and supply of other currencies.

9. If the spot exchange rate is £1=$1.50 when the market opens, and £1=$1.48 at the end of the day, the pound has appreciated, and the dollar has depreciated.

10. A spot exchange rate is quoted for 30 days, 90 days, and 180 days into the future.

11. When two parties agree to exchange currency and execute the deal at some specific time in the future, a forward exchange occurs.

12. To minimize the risk of an unanticipated change in exchange rates, a company can protect itself by entering into a forward exchange contract.

13. If $1 bought more yen with a spot exchange than with a 30-day forward exchange it indicates the dollar is expected to depreciate against the yen in the next 30 days. When this occurs, we say the dollar is selling at a premium on the 30-day forward market.

14. Differences in the spot exchange rate and the 30-day forward rate are normal

and reflect the expectations of the foreign exchange market about future currency movements.

15. If the spot rate is $1 = ¥120, and the 30-day forward rate is $1 = ¥130, the dollar is selling at a discount in the forward market.

16. A currency swap is the rate at which a foreign exchange dealer converts one currency into another on a particular day.

17. A currency swap deal enables companies to insure themselves against foreign exchange risk.

18. The foreign exchange market is a global network of banks, brokers, and foreign exchange dealers connected by electronic communications systems.

19. The most important trading centers for currencies are Zurich, Frankfurt, Paris, Hong Kong, and Sydney.

20. The foreign exchange market is open for only 12 hours in a day.

21. Arbitrage opportunities abound in the foreign exchange markets and they tend to be available for long periods of time.

22. Although a foreign exchange transaction can involve any two currencies, most transactions involve pounds on one side.

23. If the law of one price were true for all goods and services, the purchasing power parity (PPP) exchange rate could be found from any individual set of prices.

24. There are no impediments to the free flow of goods and services in an efficient market.

25. The PPP theory argues that the exchange rate will change even if relative prices remain unchanged.

26. Inflation occurs when output increases faster than the money supply.

27. The PPP theory tells us that a country with a high inflation rate will see depreciation in its currency exchange rate.