Exam 11: Foreign Exchange

A corporation dealing in foreign exchange may desire to obtain an exchange quote between the pound and franc, whose values are both expressed relative to the dollar. ____ are used to determine such a relationship.

The U.S. demand for pounds is derived from U.S. exports to the United Kingdom, U.K. investments in the United States, and U.K. tourist expenditures in the United States.

Most foreign exchange trading is carried out in the forward market.

If you have a commitment to pay a friend in Britain 1,000 pounds in 30 days, you could remove the risk of loss due to the appreciation of the pound by:

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.

In the interbank market for foreign exchange, the ____ refers to the price that a bank is willing to pay for a unit of foreign currency.

Arbitrage results in a riskless profit since a trader purchases a currency at a low price and simultaneously resells it at a higher price.

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.

An increase in the trade-weighted value of the dollar indicates a dollar appreciation relative to the currencies of its major trading partners and a worsening of U.S. international competitiveness.

Table 11.2. Supply and Demand of British Pounds Quantity Dollars Quantity of Pounds per of Pounds Supplied Pound Demanded 1,000 2.00 200 800 1.80 400 600 1.60 600 400 1.40 800 200 1.20 1,000 -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.

The offer rate

If a Citibank dealer expects the Swiss franc to depreciate in the future, he will lower bid and offer rates for the franc in order to discourage other dealers from selling francs to Citibank and persuade other dealers to buy francs from Citibank.

Over time, a depreciation in the value of a nation's currency in the foreign exchange market will result in:

When the dollar depreciates

Which of the following would not induce the U.S. demand curve for foreign exchange to shift backward to the left?

Foreign-exchange brokers help commercial banks carry out foreign exchange trading and maintain desired balances of foreign exchange.

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.

The supply schedule of pesos has a negative-sloping region corresponding to the inelastic region on the Mexican demand schedule for foreign currency.

"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.

The trade-weighted dollar is the weighted average of the exchange rates between the dollar and the most important industrial-country trading partners of the United States.