International Finance Management Answer 1

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FINC3011 Tutorial 1 B&H Chapter 2 Questions 1, 2, 3, 4, 5, 6 & 9 1. What is an exchange rate? Answer: An exchange rate is the relative price of two currencies, like the U.S. dollar price of the euro, the Thai baht price of the Malaysian ringgit, or the Mexican peso price of the Canadian dollar.

2. What is the structure of the foreign exchange market? Is it like the New York Stock Exchange? Answer: The interbank foreign exchange market is a very large, diverse, over-the-counter market, not a physical trading place where buyers and sellers gather to agree on a price to exchange currencies. Traders, who are employees of financial institutions in the major financial cities around the world, deal with each other primarily over the phone or via computer, with written or formal electronic confirmations of transactions occurring only later.

3. What is a spot exchange rate contract? When does delivery occur on a spot contract? Answer: When currencies in the interbank spot market are traded, certain business conventions are followed. For example, when the trade involves the U.S. dollar, business convention dictates that spot contracts are settled in 2 business days—that is, the payment of one currency and receipt of the other currency occurs in 2 business days. One business day is necessary because of the back-office paperwork involved in any financial transaction. The second day is needed because of the time zone differences around the world. Several exceptions to the 2-business-day rule are noteworthy. First, for exchanges between the U.S. dollar and the Canadian dollar or the Mexican peso, the rule is 1 business day. Second, if the transaction involves the dollar and the first of the 2 days is a holiday in the United States but not in the other settlement center, the first day is counted as a business day for settlement purposes. Third, Fridays are not part of the…...

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