Ch.7 Foreign Currency Transactions & Hedging Foreign Exchange Risk

Front 1

Exchange rate is the?

Back 1

cost of one currency in terms of another

Front 2

Rates published daily in the Wall Street Journal are as of 4PM Easter time on the day prior to publication.

The published rates are?

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wholesale rates banks use with each other

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Compared to wholesale rates retail rates to consumers are (higher/Lower)

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Higher

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The difference between rates at which a bank is willing to buy and sell currency is known as the

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spread

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rates change .......

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constantly

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The exchange rate that is available today

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Spot rate

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Exchange rate that can be locked in today for an expected future exchange transaction

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Forward rate

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the actual spot rate at the future date may ....... from today's forward rate

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differ

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a ....... option allows for the sale of foreign currency by the option holder

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Put

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a ....... option allows for the purchase of foreign currency by the option holder

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Call

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an option gives the holder the ..... but not the ..... to trade the foreign currency in the future.

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right, obligation

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The value of US currency is allowed to fluctuate freely according to market forces with little or no intervention from the central bank

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Independent Float

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The value of the currency is fixed in terms of a particular foreign currency and the central bank intervenes as necessary to maintain the fixed value

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Pegged to another currency

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2 columns of information are published for each day's exchange rates. The first column, in US$, indicates the number of US dollars needed to purchase one unit of foreign currency. These are known as?

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direct quotes

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The 2nd column , per US$, indicates the number of foreign currency units that could be purchased with one US dollar. These are called?

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indirect quotes

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The 3rd column indicates the

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year-to-date change in the value of each foreign currency

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The forward rate can exceed the spot rate on a given date, in which case the foreign currency is said to be selling at a?

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premium in the forward market

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The forward rate can be less than the spot rate in which case it is selling at a?

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discount

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Currencies sell at premium or discount because of?

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differences in interest rates between two countires

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when the interest rate in the foreign country exceeds the domestic interest, the foreign currency sells at a?

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discount in the forward market

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if foreign interest rate is less than domestic rate the foreign currency sells at a?

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premium

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forward rates are said to be unbiased predictors of the?

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future spot rate

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The ..... ..... is the exchange rate at which the option will be executed if the option holder decides to execute the option

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Strike price

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Unlike a forward contract, for which banks earn their profit through the spread between buying and selling rates, options must actually me purchased by paying an...... .....

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option premium

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an option premium is a function of two components:

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intrinsic value and time value

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an options intrinsic value is equal to the?

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gain that could be realized by exercising the option immediately

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an option with a positive intrinsic value is said to be?

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in the money

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The time value of an option relates to the fact that the?

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spot rate can change over time and cause the option to be in the money