1-) Explain the basic differences between the operation of a currency forward market and a futures...

Question

1-) Explain the basic differences between the operation of a currency forward market and a futures market?
2-) In the October 23 , 1999 , issue , The Economist reports that the interest rate per annum is 5.93 percent in the United States and 70.0 percent in Turkey. Why do you think the interest rate is so high in Turkey? On the basis of the reported interest rates, how would you predict the change of the exchange rate between the US dollar and the Turkish Lira?
3-) Assume that the euro is trading at a spot price of $1.49/€. Further assume that the premium of an American call ( put ) option with an exercise price of $1.50 is 1.55 (3.70) cents. Calculate the intrinsic value and the time value of the call and the put option.
4-) A Bank is quoting the following exchange rates against the dollar for the Swiss franc and the Australian dollar
SFr/$ = 1.5960-70
A$/$ = 1.7225-35
An Australian firm asks the bank for an A$/SFr quote. What cross rate would the bank quote?
5-) Explain the following three concepts of purchasing power parity. (PPP)

The law of one price

Absolute PPP

Relative PPP

1-) Explain the basic differences between the operation of a currency forward market and a futures market? 2-) In the October 23 , 1999 , issue , The Economist reports that the interest rate per annum is 5.93 percent in the United States and 70.0 percent in Turkey. Why do you think the interest rate is so high in Turkey? On the basis of the reported interest rates, how would you predict the change of the exchange rate between the US dollar and the Turkish Lira? 3-) Assume that the euro is trading at a spot price of $1.49/€. Further assume that the premium of an American call ( put ) option with an exercise price of $1.50 is 1.55 (3.70) cents. Calculate the intrinsic value and the time value of the call and the put option. 4-) A Bank is quoting the following exchange rates against the dollar for the Swiss franc and the Australian dollar SFr/$ = 1.5960-70 A$/$ = 1.7225-35 An Australian firm asks the bank for an A$/SFr quote. What cross rate would the bank quote? 5-) Explain the following three concepts of purchasing power parity. (PPP) a) The law of one price b) Absolute PPP c) Relative PPP

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Robert · Accepted Answer

1-) Explain the basic differences between the operation of a currency forward market 
and a futures market? 
Forward and the futures market are completely different even though there are some 
similarities in the contracts. The forward market is always an OTC market (Over the counter) 
where the contracts are customized according to the needs of the parties involved. The foreign 
currency contracts are normally between a client and a bank.  
In the futures market, the contracts are standardized in terms of the size of one contract 
and the terms and conditions are always fixed. It cannot be tailor made according to the parties 
involved. 
In forward market there is no exchange of funds before the maturity date or settlement 
date but futures contract are market to market daily. 
2-) In the October 23 , 1999 , issue , The Economist reports that the interest rate per 
annum is 5.93 percent in the United States and 70.0 percent in Turkey.

1-) Explain the basic differences between the operation of a currency forward market and a futures market? 2-) In the October 23 , 1999 , issue , The Economist reports that the interest rate per annum...

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