A second function of the foreign exchange market is to provide exchange possibility that unpredicted changes in future exchange rates will have adverse consequences for the firm. insurance against risk, which is the
A second function of the foreign exchange market is to provide exchange possibility that unpredicted changes in future exchange rates will have adverse consequences for the firm. insurance against risk, which is the
Chapter5: Currency Derivatives
Section: Chapter Questions
Problem 14QA
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Transcribed Image Text:Title: Identification
Things to do:
1. A
second
function
of
the
foreign
exchange market is to
provide
exchange
possibility that unpredicted changes
future exchange rates
adverse consequences for the firm.
insurance
against
risk,
which
is
the
in
will have
exchange rate is the rate
foreign exchange dealer
2. The
at
which
a
converts
currency into another
one
currency on a particular day.
3.
The
value
of
a
is
determined
by
the
interaction
between
the
demand
and
supply of
that currency relative to the demand
and supply of other currencies.
4. A
parties agree
exchange occurs
to exchange currency
when two
and
execute
the
deal
at
some
specific date in the future.
5.
rates governing such future
transactions
are
referred
to
as
forward exchange rates.
6. Changes in
be problematic for an
business.
exchange rates
can
international
7. A
is
the
simultaneous
purchase and sale of a given amount
of
foreign
exchange
for
two
different value dates.
8. When
a
firm
enters
into
a
it is taking out
possibility
exchange contract,
insurance
against
the
that future exchange rate movements
will make a transaction unprofitable
by
been executed.
the
time
that
transaction
has
9. To
risk, the U.S. importer might want
to engage in a forward exchange.
10. When
insure
or
against
the
a
firm insures itself against
foreign exchange risk,
it is engaging in
we
say that
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