theories of foreign ER determination

Question 1

What are spot operations?

Answer 1

agreements to exchange one currency for another at a specified exchange rate. The exchange of these currencies must take place within 48 hours of the transaction date

Question 2

What are forward operations?

Answer 2

currency exchange agreements that are currently carried out but whose materialization will take place at a predestined future time
they are not standardized nor being traded on organized markets (börse)

Question 3

How is the forward exchange rate calculated?

Answer 3

Based on three figures:

1. the cash exchange rate on the day of the transaction
2. the interest rate at which the customer borrows the currency sold
3. the interest rate at which the customer deposits the purchased currency

Question 4

How Is the difference between the forward rate and the cash rate named?

Answer 4

swap points (or pips)

Question 5

What is the formula to calculate the forward rate?

Answer 5

Tp = TA/B * (1 + iA * (n/360))/(1+iB * (n/360))

TA/B: spot rate
interest rate of both currencies (iA, iB)
period (n)

Question 6

How to determine the percentage of DISCOUNT OR PREMIUM with which some currencies are quoted?

Answer 6

a) direct: [( forward rate - spot rate) / spot rate] * (360/n) * 100
b) indirect [(spot rate - forward rate) / forward rate] * (360/n) * 100

Question 7

What is a future contract?

Answer 7

obliges both parties to carry out a specific exchange of currencies on a specific future date.
–> company would agree to acquire the currency it needs today at a predetermined price (forward exchange rate) so that it can be delivered on an agreed date (expiration date)

Question 8

What is the fisher effect?

Answer 8

Interest rates and inflation are correlating over the years