Exam 11: Foreign Exchange

If it takes $1.5515 to buy 1 pound and $0.6845 to buy 1 franc, it takes 2.27 francs to buy 1 pound.

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

Exhibit 11.1 Assume the following: (1) the interest rate on 6-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 6-month forward price of the pound is $1.485. -Refer to Exhibit 11.1. By investing in U.K. treasury bills rather than U.S. treasury bills, and not covering exchange rate risk, U.S. investors earn an extra return of:

As the dollar's exchange value appreciates against the pound, U.S. residents tend to import more British goods and thus demand more pounds.

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 trade-weighted dollar moves from an index value to 100 to 110, the dollar depreciates by 10 percent against the trade-weighted averages of the exchange rates of the major trading partners of the United States.

A major difference between the spot market and the forward market is that the spot market deals with:

The demand schedule for Swiss francs is always downsloping while the supply schedule of francs is always upsloping.

Exhibit 11.1 Assume the following: (1) the interest rate on 6-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 6-month forward price of the pound is $1.485. -Refer to Exhibit 11.1. If the price of the 6-month forward pound were to ____, U.S. investors would no longer earn an extra return by shifting funds to the United Kingdom.

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 Canada 1.5326 1.4400 2.2362 0.9790 Japan 124.48 116.96 181.63 79.515 Mexico 9.7410 9.1526 14.213 6.2223 Switzerland 1.5655 1.4709 2.2842 \ldots\ldots\ldots UK .68540 .6440 \ldots\ldots\ldots .4378 Euro 1.06430 \ldots\ldots\ldots 1.5529 .67984 US \ldots\ldots\ldots 9396 1.4591 63877 -Referring to Table 11.3, the yen cost of purchasing 100 British pounds is roughly:

How is the equilibrium rate of exchange determined?

During the era of dollar appreciation, from 1981 to 1985, a main reason why the dollar did not fall in value was:

Table 11.4. Forward Exchange Rates U.S. Dallar Equivalent Wedinesday Tuesday Switzerland (Franc) .6598 .6590 30- day Farward .6592 .6585 90-day Farward .6585 .6578 180- tay Farward .6577 .6572 -Refer to Table 11.4. On Wednesday, the 90-day forward franc was selling at a:

A foreign currency option is an agreement between a holder (corporation) and a writer (commercial bank) giving the holder the right to buy or sell a certain amount of foreign currency at any time through some specified date.

When short-term interest rates become lower in Tokyo than in New York, interest arbitrage operations will most likely result in a(n):

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

If the Swiss demand for dollars is elastic, 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.

Exhibit 11.1 Assume the following: (1) the interest rate on 6-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 6-month forward price of the pound is $1.485. -Assume that you are the Chase Manhattan Bank of the United States, and you have 1 million Swiss francs in your vault that you will need to use in 30 days. Moreover, you need 500,000 British pounds for the next 30 days. You arrange to loan your francs to Barclays Bank of London for 30 days in exchange for 500,000 pounds today, and reverse the transaction at the end of 30 days. You have just arranged a:

If it takes $0.18544 to purchase 1 French franc, it takes 5.3926 francs to purchase $1.