Exam 11: Foreign Exchange

In the early 1980s,the Federal Reserve pursued a tight monetary policy.All else being equal,the impact of that policy was to ____ interest rates in the United States relative to those in Europe and cause the dollar to ____ against European currencies.

Table 11.2.Supply and Demand of British Pounds -Refer to Table 11.2.At the exchange rate of $1.40 per pound,there is an ____ for pounds.This imbalance causes ____ in the price of the pound,which leads to ____ in the quantity of pounds supplied and ____ in the quantity of pounds demanded.

If the exchange rate is $0.01 per yen in New York and $0.015 per yen in Tokyo,an arbitrager could profit by buying yen in Tokyo and simultaneously sell them in New York.

If the spot price of the Swiss franc is $0.4020 and the 90-day forward franc sells for $0.4026,the franc is at a 90-day forward discount of $0.0006,or at a 0.2 percent forward discount per annum against the dollar.

Table 11.3.Key Currency Cross Rates -Referring to Table 11.3,the cross exchange rate between the euro and Swiss franc is approximately:

A call option provides an options holder

Stabilizing speculation reinforces market forces by intensifying an appreciation or a depreciation in a currency's exchange value.

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.

Similar to stock and commodity exchanges,the foreign exchange market is an organized structure with a central meeting place and formal licensing requirements.

Suppose the selling price of one-month forward British pounds is $1.6036 per pound and the spot price of the pound is $1.6039.This means that there is an annual forward discount on the pound equal to 0.2 percent.

During the era of dollar appreciation,in the 1980s,a main reason why the dollar did not fall in value was:

If Citibank quoted bid and offer rates for the Swiss franc at $.4850/$.4854,the bank would be prepared to buy,say,1 million francs for $485,000 and sell them for $485,400.

Given the foreign currency market for the Swiss franc,the supply of francs slopes upward,because as the dollar price of the franc rises:

The supply for foreign exchange results from transactions that appear on the a.credit side of a country's balance of payments statement b.debit side of a country's balance of payments statement c.both the credit side and the debit side of a country's balance of payments statement d.neither the credit side nor the debit side of a country balance of payments statement

Currency arbitrage tends to result in identical yen/dollar exchange rates in New York and in Tokyo.

Suppose the exchange value of the British pound is $2 per pound while the exchange value of the Swiss franc is 50 cents per pound.The cross exchange rate between the pound and the franc is:

If the Swiss demand for dollars is inelastic,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.

Concerning the covering of exchange market risks--assuming that a depreciation of the domestic currency is anticipated,one can say that there is an incentive for:

Most foreign exchange transactions are conducted between commercial banks and household customers.

When the dollar gets stronger