Study Unit 6 - Foreign Exchange and Derivatives

Question 1

Exchange rates fluctuate depending upon the demand for each country’s currency. If a country raises its interest rates, its currency will ____________.

Answer 1

Appreciate (AKA increase). Also the demand curve for the currency will shift to the right.

Conversely, if interest rates decrease, then currency will also decrease.

Question 2

Decline in value of a U.S. Dollar will ______

Answer 2

Lower prices of U.S. Goods to foreign consumers
This helps exporters of domestically produced goods.
Low value of $ = decreases imports by making foreign goods more expensive.

Question 3

A “Put” is an option that gives the owner the right to do ____

Answer 3

A put option gives the buyer the right to SELL the underlying asset at a fixed price. An option has an expiration date after which it can no longer be exercised.

Put = SELL
Put it up for sell

Question 4

A “Call” is an option that gives the owner the right to do ____

Answer 4

A call option gives the buyer the right to BUY the underlying asset. An option can no longer be exercised after the expiration date.

Call - BUY
Call to BUY

Question 5

When should you exercise a PUT option (SELL)?

When should you exercise a CALL option (BUY)?

Answer 5

When the exercise price is > than price of underlying asset.

When the exercise price is < than price of underlying asset.