Chapter 1
1. In what ways might the following be affected by sudden, unexpected changes in exchange rates?
a An American holder of US Treasury bonds
b An American holder of GM stock
c An American on vacation in Mexico
d An American holder of Honda stock
e A Canadian on vacation in the United States
2. What is meant by “shrinkage of economic space”?
3. What are the possible implications of adoption of a common currency such as the euro?
4. What competitive advantages may be behind the success of a particular industry in international trade?
5. Why have some governments been concerned with the growing importance of multinational corporations?
Chapter 2
1. Do you think that because of the costs of moving banknotes back to their country of circulation, buying foreign currency banknotes could sometimes be cheaper than buying bank drafts? Could there be a seasonal pattern in exchange rates for banknotes? [Hint:Think of what is involved in shipping US dollars arising from Americans visiting Canada in summer and Canadians visiting the US in winter.]
2. How can companies that issue and sell traveler’s checks charge a relatively low fee? How do they profit?
3. How do you think the percentage bid–ask spread on euros versus pounds would compare to the percentage spread on the New Zealand dollar versus the Mexican peso?
4. What steps are involved in settling a purchase made in Britain with a credit card issued by a US bank? Why do you think the spread between buy and sell rates used in credit card payments is smaller than those applying to foreign banknotes?
5. Does the use of US dollars as the principal currency of quotation put US banks at an advantage for making profits? What might lead to a change in the role of the US dollar as the leading international currency?
6. Why do you think that banks give bid and ask rates when dealing with each other? Why don’t they state their intentions as they do when dealing with foreign exchange brokers?
7. Check a recent business newspaper or the business page for spot exchange rates. Form an n´n exchange-rate matrix by computing the cross rates, and check whether S($/£) = 1/S(£/$) and so on.
8. Complete the following exchange-rate matrix. Assume that there are no transaction costs.
Chapter 3
1. Why are forward spreads on less traded currencies larger than on heavily traded currencies?
2. Why do banks quote mainly even-dated forward rates – for example,one-month rates and three-month rates – rather than uneven-dated rates? How would you prorate the rates of uneven-dated maturities?
3. Compute the outright forward quotations from the following swap quotations of Canadian dollars in European terms:
4. When would bid–ask spreads widen quickly as we increase maturity in the forward market? How would spreads differ between a volatile time and a stable time.
5. Could a bank that trades forward currency ever hope to balance the buys and sells of forward currencies for each and every future date? How do swap contracts help?
6. Why do banks operate a forward exchange market in only a limited number of currencies? Does it have to do with the ability to balance buy orders with sell orders, and is it the same reason why they rarely offer contracts of over five years?
7. Why is risk neutrality relevant for the conclusion that forward exchange rates equal the market’s expected future spot exchange rates?
8. Why is it necessary to assume zero spreads when concluding that forward exchange rates equal expected future spot rates?
9. Plot the payoff profile for a forward contract to buy US$1 million at Can$1.0500/$.
10. Plot the payoff profile for a forward contract to sell US$1 million at ¥120/$.