1. (a) What are the advantages and disadvantages of fixed exchange rates?
(b) What does a floating rate of exchange mean? What is the role of government in managing a floating rate of exchange?
2.(a) What is the balance of payments?
(b) What institution provides the primary source of similar statistics for balance of payments and economic performance worldwide?
(c) Business managers and investors need BOP data to anticipate changes in host country economic policies that might be driven by BOP events. From the perspective of business managers and investors list three specific signals that a country’s BOP data can provide.
(d) What does it mean to describe the balance of payments as a flow statement?
(e) What are the two main types of economic activity measured by a country’s BOP?
(f) Why does the BOP always “balance”?
3(a) What is a foreign currency future?
(b) How do foreign currency futures and foreign currency forwards compare?
(c) Define a put and call on the British pound sterling.
4.(a) Define the law of one price carefully, noting its fundamental assumptions. Why are these assumptions so difficult to find in the real world in order to apply the theory? (b) Define the two forms of purchasing power parity, absolute and relative.
(c) How close does the Big Mac Index conform to the theoretical requirements for a one-price measurement of purchasing power parity?
5. Define the following terms:
a. Foreign exchange market.
b. Foreign exchange transaction.
c. Foreign exchange.
e. For each of the foreign exchange market participants, identify their motive for buying or selling foreign exchange.
Foreign exchange dealers
Foreign exchange brokers
Individuals and firms conducting international business
Speculators and arbitragers
Central banks and treasuries
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