Chapter 9

Question 1

2 Main Functions or the Foreign Exchange Market

Answer 1

1. to convert the currency of one country into the currency of another.
2. to provide some insurance against foreign exchange risk, or the adverse consequences of unpredictable changes in exchange rates,

Question 2

Currency Speculation

Answer 2

Involves short-term movements of of funds from one currency to another in hopes of profiting from shifts in exchange rates.

Question 3

Carry Trade

Answer 3

involves borrowing in one currency where interest rates are low and then using the proceeds to invest in another currency.

Question 4

Spot Exchange Rate

Answer 4

the rate at which a foreign exchange dealer converts one currency into another currency on a particular day.

Question 5

Forward Exchange Rates

Answer 5

the exchange rates governing forward exchange transactions.

Question 6

Currency Swap

Answer 6

the simultaneous purchase and sale of a given amount of foreign exchange for 2 different value dates.