# FOREIGN EXCHANGE MARKET: RISK, APPRECIATION,/DEPRECIATION

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FOREIGN EXCHANGE MARKET: RISK, APPRECIATION,/DEPRECIATION
FORWARD CONTRACTS, RISK MANAGEMENT (7 questions in total).

1) One of the functions of the foreign exchange market is to convert currencies. Convert the currencies as indicated below (note how the rate is presented in order to determine how to calculate the amount you would receive): (1 point)
CONVERT RATE AMOUNT
100,000 US\$ 1 US\$ = 108.14 yen (¥) yen (¥) 10,814,000
45,000 US\$ 1 US\$ = 13.5033 Mex. Peso Mex. Peso 607,648.5
1200 US\$ 1 Euro(€) = 1.2624 US\$ Euro (€) 1,514.88
250 Brit.Pound (£) 1 BritPound(£) = 1.5360 US\$ US\$ 162.76
150,000 Indian rupee INR 1 US\$ = 60.9610 INR US\$ 9,144,150
2500 Australian \$ 1 US \$ = 1.3542 Aus.\$ US\$ 3,385.5

2) Explain what appreciation of a currency means. Explain what depreciation of a currency means. (1 point)

3) What is Foreign Exchange risk? (1 point)

4) Analyze the following exchange rates and identify if the subject currencies indicated are appreciating or depreciating in value based on the “new” rates quoted. (2 points)
OLD RATE NEW RATE SUBJECT APP/DEP?
1 US\$ = 90.20 Swiss Franc 1 US\$ = 95.38 Swiss Franc Swiss Franc
1 ThBaht = US\$ .0282 1 ThBaht = US\$ .0296 Thai baht
108¥ Jap. yen = 1 US\$ 98¥ Jap. yen = 1 US\$ Japanese yen
1 Russ. ruble= US\$ .0281 1 Russ. Ruble = US\$ .0238 US dollar
1 US\$ = 6.8365 Swed.krona 1US\$ = 7.2773 Swed. krona Swedish krona
1Euro(€) = US\$ 1.3719 1Euro(€) = US\$ 1.38957 Euro
1US\$ = 1,014.95 So.Kor.won 1US\$ = 1,053.11So.Kor.won US dollar
1 US\$ = 1.0188 Can. \$ 1 US\$ = .9645 Can. \$ Canadian dollar
1 US\$ = 7.5610 Arg. Peso 1 US\$ = 7.86029Arg. Peso Argentine peso
13.0260 MXP = 1 US\$ 13.0560 MXP = 1 US\$ Mexican peso
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5) What are forward exchange contracts? What is their purpose? What does it mean when a currency is selling at “discount on forward”? What does it mean when a currency is selling at “premium on forward”? (2 points)

6) Analyze the spot and forward rates quoted below. Identify if the expectation is, based on the forward rates, that the subject currencies indicated are going to appreciate or depreciate in value and if they are selling at a discount or premium on the forward rate. (The subject currency is what you hold and must convert) (1.5 points)

COUNTRY SPOT RATE FORWARD RATE SUBJECT APP/DEP DISC/PREM on FWD?
GERMANY 1.2667 US\$/ Euro 1.1116 US \$/Euro EURO
GREAT BRITAIN 1.6608 US \$/£ 1.3930 US \$/£ BRITISH POUND