Exam 11: Foreign Exchange

The supply schedule of yen has a positive-sloping region, which corresponds to the inelastic region on the Japanese demand schedule for foreign currency.

Assume that the exchange rate between the euro and the pound has changed from 2 euros per pound to 3 euros per pound.We can say that the

With arbitrage, a trader attempts to purchase a foreign currency at a low price and, at a later date, resell the currency at a higher price in order to make a profit.

The foreign exchange market refers to the organizational setting within which individuals and businesses, but NOT government and banks, buy and sell foreign currencies and other debt instruments.

When the real exchange rate of the Japanese yen depreciates,

"Futures" currency contracts are issued by commercial banks and are tailored in size to the needs of the exporter or importer, while "forward" currency contracts are issued by the International Monetary Market in standardized round lots.

An appreciation in the value of the U.S.dollar against the British pound would tend to

If the Swiss demand for dollars is elastic, then a depreciation of the dollar against the franc will lead to a greater quantity of francs being supplied to the foreign exchange market to obtain dollars.

The demand for foreign exchange is derived from credit transactions on the balance of payments.

Figure 11.1. Supply and Demand Schedules of Francs ​ -Refer to Figure 11.1.Suppose the exchange rate is $.30 per franc.At this exchange rate, there is an ____ of francs, which leads to a ____ in the dollar price of the franc, a(n) ____ in the quantity of francs supplied, and a(n) ____ in the quantity of francs demanded.

In the interbank market for foreign exchange, the ____ refers to the difference between the offer rate and the bid rate.

Most foreign exchange transactions involve the transfer of cash, rather than electronic balances, between commercial banks or foreign exchange dealers.

When the dollar gets stronger,

The exchange rate is the price at which the ______ of Switzerland exchanges for the ______ of Germany.

Assume that Boeing anticipates receiving 20 million yen in three months from exports of jumbo jets to a Japanese airline.The 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 forward market at today's forward rate.

A "call" option gives General Motors the right to sell pounds at a specified price, while a put option gives General Motors the right to buy pounds at a specified price.

Given an upward-sloping supply schedule of pounds and a downward-sloping demand schedule for pounds, an increase in the supply schedule causes an appreciation of the dollar against the pound.

Exhibit 11.1 Assume the following: (1) the interest rate on six-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 six-month forward price of the pound is $1.485. -Refer to Exhibit 11.1.If U.S.investors cover their exchange rate risk, then the extra return for the six months on the U.K.treasury bills is

If a household purchases small amounts of foreign currency from an automated teller machine (ATM), the bank typically imposes an additional service charge for the transaction.

Given an upward-sloping supply schedule of pounds and a downward-sloping demand schedule for pounds, a decrease in the supply schedule causes an appreciation of the dollar against the pound.