1. Utah Bank’s bid price for Canadian dollars is $.7938 and its ask price is $.81. What is the bid/ask percentage spread? 2. Of what use is a forward contract to an MNC?
3. If a euro is worth $.80, what is the value of a dollar in euros? 4. What is the function of the Eurocurrency market?
5. Why do interest rates vary among countries? Why are interest rates similar for those European countries that use the euro as their currency?
Small Business Dilemma
Use of the Foreign Exchange Markets by the Sports Exports Company (see textbook, 8th edition)
1. Assume that the U.S. inflation rate becomes high relative to Canadian inflation. Other things being equal, how should this affect the (a) U.S. demand for Canadian dollars, (b) supply of Canadian dollars for sale, and (c) equilibrium value of the Canadian dollar? 2. Assume that the U.S. income level rises at a much higher degree than does the Canadian income level. Other things being equal, how should this affect the (a) U.S. demand for Canadian dollars, (b) supply of Canadian dollars for sale, and (c) equilibrium value of the Canadian dollar? 3. What is the expected relationship between the relative real interest rates of two countries and the exchange rate of their currencies? 4. Explain why a public forecast by a respected economist about future interest rates could affect the value of the dollar today. Why do some forecasts by well-respected economists have no impact on today’s value of the dollar? 5. Every month, the U.S. trade deficit figures are announced. Foreign exchange traders often react to this announcement and even attempt to forecast the figures before they are announced. a. Why do you think the trade deficit announcement sometimes has such an impact on foreign exchange trading? b. In some periods, foreign exchange traders do not respond to a trade deficit announcement, even when the announced deficit is very large. Offer an explanation for such a lack of response.
1. How can currency futures be used by corporations? How can currency futures be used by speculators? 2. When would a U.S. firm consider purchasing a put option on euros for hedging? 3. When should a speculator purchase a put option on Australian dollars? 4. List the factors that affect currency call option premiums and briefly explain the relationship that exists for each. Do you think an at-the-money call option in euros has a higher or lower premium than an at-the-money call option in British pounds (assuming the expiration date and the total dollar value represented by each option are the same for both options)? 5. Assume that a March futures contract on Mexican pesos was available in January for $.09 per unit. Also assume that forward contracts were available for the same settlement date at a price of $.092 per peso. How could speculators capitalize on this situation, assuming zero transaction costs? How would such speculative activity affect the difference between the forward contract price and the futures price?
Small Business Dilemma
Use of Currency Futures and Options by the Sports Exports Company (see textbook, 8th edition)
1. What are some advantages and disadvantages of a freely floating exchange rate system versus a fixed exchange rate system? 2. How can a central bank use indirect intervention to change the value of a currency? 3. The media frequently reports that “the dollar’s value strengthened against many currencies in response to the Federal Reserve’s plan to increase interest rates.” Explain why the dollar’s value may change even before the Federal Reserve affects interest rates. 4. Assume there is concern that the United States may experience a recession. How should the Federal Reserve influence the dollar to prevent a recession? How might U.S. exporters react to this policy (favorably or unfavorably)? What about U.S. importing firms? 5. What is...