Chapter 6 The Foreign Exchange Market
Exercises
1.Single-choice questions
dbbcd
bacaa
bdadb
accaa
2.True/False questions
TFTFF
3.Essay questions
(1)
The Mexican buyer has to sell pesos to get dollars to pay the US exporter.The Mexican firm contacts its bank and requests a quotation of the exchange rate for selling pesos and acquiring 100,000 dollars.If the rate is acceptable, the Mexican firm instructs its bank to take pesos from its checking account, convert into 100,000 dollars and transfer the dollars to the US producer.The Mexican bank holds the dollar denominated deposits in the United States, at its correspondent bank in New York.The Mexican bank instructs its correspondent bank in New York to take dollars from its checking account and transfer the dollars to the US producer.This completes the international payment for computers.
(2)
a.Buy 0.85 euros, then buy 127.5 yen in Paris with 0.85 euros then convert 127.5 yen back to dollars which makes 1.02 dollars yielding a profit of $0.02.
b.The forces of demand and supply will ensure that there is no arbitrage opportunity.For instance, this could happen by depreciating the euro in Paris to about 1 euro = 147 yen.
(3)
a.The euro depreciates; there is an increased supply of euros.
b.The euro depreciates; there is an increased demand for the British pound.
c.The euro appreciates; there is a decreased supply of euros.
4.Questions and calculations
(1)Yes.One could purchase New Zealand dollars at Y Bank for $0.80 and sell them to X Bank for $0.802.With $1 million available, 1.25 million New Zealand dollars could be purchased at Y Bank.These New Zealand dollars could then be sold to X Bank for $1,002,500, thereby generating a profit of $2,500.
(2)The Three level of foreign exchange market.
a.Foreign exchange transaction between the center bank and bank.
b.Foreign exchange transaction between banks.
c.Foreign exchange transaction between bank and client.