Chapter 6 Solutions - Chapter 6 End-of-Chapter Question...

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Chapter 6 End-of-Chapter Question Solutions _______________________________________________________________________ _____________________ 1 CHAPTER 4: FOREIGN EXCHANGE MARKETS 1. Definitions. Define the following terms: a) The foreign exchange market provides the physical and institutional structure through which the money of one country is exchanged for that of another country, the rate of exchange between currencies is determined, and foreign exchange transactions are physically completed . b) A foreign exchange transaction is an agreement between a buyer and seller that a fixed amount of one currency will be delivered for some other currency at a specified rate. c) Foreign exchange means the money of a foreign country; that is, foreign currency bank balances, bank notes, checks, and drafts. 2. Functions of the foreign exchange market. What are the three major functions of the foreign exchange market? a) To transfer purchasing power from one country and its currency to another. Typical parties would be importers and exporters, investors in foreign securities, and tourists. b) To finance goods in transit. Typical parties would be importers and exporters. c) To provide hedging facilities. Typical parties would be importers, exporters, and creditors and debtors with short-term monetary obligations.
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3. Market participants. For each of the foreign exchange market participants identify their motive for buying or selling foreign exchange. a) Foreign exchange dealers are banks and a few non-bank institutions that “make a market” in foreign exchange. They buy and sell foreign exchange in the wholesale market and resell or re- buy it from customers at a slight change from the wholesale price. b) Foreign exchange brokers (not to be confused with dealers) act as intermediaries in bringing dealers together, either because the dealers do not want their identity revealed until after the transaction or because the dealers find that brokers and “shop the market,” i.e., scan the bid and offer prices of many dealers very quickly. c) Individuals and firms conducting international business consist primarily of three categories: importers and exporters, companies making direct foreign investments, and securities investors buying or selling debt or equity investments for their portfolios. d) Speculators and arbitragers buy and sell foreign exchange for profit. Speculators and
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This note was uploaded on 03/10/2012 for the course ACCOUNTING 5450 taught by Professor Brown during the Spring '12 term at Colorado Technical University.

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Chapter 6 Solutions - Chapter 6 End-of-Chapter Question...

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