International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
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Which of the following best describes the terms 'long forward position' and 'short forward position' in foreign exchange trading?
A short forward position is holding a currency for a short duration, while a long forward position is holding it for a longer period.
A short forward position means you have agreed to sell a currency in the future, while a long forward position means you have agreed to buy it in the future.
A long forward position is when you expect the currency's future spot rate to decrease, and a short forward position is when you expect it to increase.
A long forward position means you have agreed to sell a currency in the future, and a short forward position means you have agreed to buy it in the future.
Suppose that a commercial bank’s current quote for transactions involving the United Kingdom pound is A$1.9120/75.
(a) Define the ask and bid prices in general terms, and state the ask and bid prices for the bank.
(b) Define the bid/ask spread in general terms, and calculate the bid/ask spread for the bank.
(c) Explain briefly why the United Kingdom does not use the Euro as its currency
Explain the implications of interest rate parity and purchasing power for U.S. dollar exchange rate against the Euro. Then, evaluate the usefulness of relative PPP in predicting movements in foreign exchange rates on (i) the short-term basis and (ii) the long terms basis.
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- Match each term in Column A with its related definition in Column B. Column A 1. ____________ Spot rate 2. ____________ Currency appreciation 3. ____________ Translation risk 4. ____________ Transaction risk 5. ____________ Exchange rate Column B a. The rate at which one currency can be traded for another currency. b. The possibility that future cash transactions will be affected by changing exchange rates. c. A month ago, 1 U.S. was worth 8.5 Mexican pesos. Today, 1 is worth 9.0 Mexican pesos. The U.S. dollar has undergone what? d. The degree to which a firms financial statements are exposed to exchange rate fluctuation. e. The exchange rate of one currency for another for immediate delivery (today).arrow_forwardGenerally speaking, how is the dollar price of euros determined? Cite a factor that might increase the dollar price of euros. Cite a different factor that might decrease the dollar price of euros. Explain: “A rise in the dollar price of euros necessarily means a fall in the euro price of dollars.” Illustrate and elaborate: “The dollar-euro exchange rate provides a direct link between the prices of goods and services produced in the eurozone and in the United States.” Explain the purchasing- powerparity theory of exchange rates, using the euro-dollar exchange rate as an illustrationarrow_forwardImagine an American MNC. Why it might decide to borrow in a country such as Brazil, where interest rates are high, rather than a country like Germany, where interest rates are low? Discuss why this may be the best strategy for the firm, given your understanding of the relationship between inflation, interest rates, and exchange rate.arrow_forward
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