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Unformatted text preview: Answer Key ʹ Foreign Exchange Worksheet: Part 1 1. What is the meaning of the term ͞ƐƉŽƚ ƌĂƚĞ͍͟ Spot Exchange rate is rate at which a foreign exchange dealer converts one currency for another. It is the current exchange rate. Spot rates are reported on a real-time basis and change continually, often on a minute by minute basis. 2. tŚĂƚ ŝƐ ƚŚĞ ŵĞĂŶŝŶŐ ŽĨ ƚŚĞ ƚĞƌŵ ͞^ƉƌĞĂĚ͍͟ Spread is the difference between the Ask Price and the Bid Price Ask Price = Price at which the dealer sells you a currency for another currency. Bid Price = Price at which the dealers buys the currency for another currency. 3. tŚĂƚ ĚĞĨŝŶĞƐ Ă ĐƵƌƌĞŶĐǇ ĂƐ ďĞŝŶŐ ĐŽŶƐŝĚĞƌĞĚ Ă ͞ŚĂƌĚ͟ ĐƵƌƌĞŶĐǇ͍ Hard currency, also known as a safe haven currency or strong currency, refers to a globally traded currency that is expected to serve as reliable and stable store of value, and therefore, there is high demand for it and is used as a reserve asset in many countries. Factors ĐŽŶƚƌŝďƵƚŝŶŐ ƚŽ ĐƵƌƌĞŶĐǇ͛Ɛ ŚĂƌĚ ƐƚĂƚƵƐ ŝŶĐůƵĚĞ ůŽŶŐ-term stability of its purchasing power, worldwide acceptance, and ƚŚĞ ĂƐƐŽĐŝĂƚĞĚ ĐŽƵŶƚƌǇ͛Ɛ ƉŽůŝƚŝĐĂů ĂŶĚ ĨŝƐĐĂů condition and outlook. The current hard currencies are: USD, JPY, EUR, GBP. 4. Some currencies have non-floating exchange rates. What are the benefits of having a non- floating currency rate? In a pegged or fixed exchange rate regime a currency's value is matched to the value of another single currency or to a basket of other currencies, or to another measure of value, such as gold. A fixed exchange rate is usually used to stabilize the value of a currency against the currency it is pegged to. This makes trade and investments between the two countries easier and more predictable, and is especially useful for small economies where external trade forms a large part of their GDP. Fixed exchange rates impose a price discipline on nations with higher inflation rates than those of countries in the rest of the world. Such a nation is likely to face persistent deficits in its balance of payments and loss of reserves. A fixed exchange rate reduces volatility and fluctuations in relative prices It can also be used as a means to control inflation. A fixed exchange rate diminishes speculation....
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- Fall '11
- United States dollar, USD, New Taiwan dollar, forward rate option