Seminar work №13

Lesson name: Fundamentals of financial institutions

Code: FIN122
Topic: The Foreign Exchange Market
CONTENT
1. Why are exchange rates important?
2. Foreign exchange trading
3. Currency supply and demand
4. Factors affecting the exchange rate
5. Exchange rates in the short term
6. Explain changes in exchange rates
Exercise No1: Make adjustments.
1 The fastest currency exchange rates A Ask rate
The Law of one
2 Commercial bank bid price B
price
Purchasing
3 Depreciation of the currency C Power of Parity
(PPP)
The exchange rate at which an asset is denominated in another
4 D Forward rate
country's currency
The exchange
5 Commercial bank ask price E rate will
weakened
If two countries produce exactly the same good, with low
transportation costs and trade barriers, then that good is
6 F Spot rate
assumed to have the same price worldwide wherever it is
produced.
The exchange rate of two countries is assumed to equalize The exchange
7 changes in the price level of any commodity in the two G rate will
countries. strengthen
8 The value of that currency will increase H Exchange rate
The rate used in the forward contract is the future rate after a
9 I Bid rate
certain period of time.

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Exercise No2 Discuss following questions.
1. If the Japanese yen continues to strengthen in the coming years or for an indefinite
period of time, when would it be beneficial for you to buy a car imported from Japan?
“A country is always worse off when its currency is weak (falls in value).” Is this
statement true, false, or uncertain? Explain your answer.
2. If the Japanese price level rises by 5% relative to the price level in the United States,
what does the theory of purchasing power parity predict will happen to the value of
the Japanese yen in terms of dollars?
3. If the demand for a country’s exports falls at the same time that tariffs on imports are
raised, will the country’s currency tend to appreciate or depreciate in the long run?
4. In the mid- to late 1970s, the yen appreciated relative to the dollar even though
Japan’s inflation rate was higher than America’s. How can this be explained by an
improvement in the productivity of Japanese industry relative to American industry?
Exercise No3 Choose the correct answer from the following.
1. If the exchange rate of the British pound to the U.S. dollar changes from 1.50 to 1.25,
the exchange rate of the pound sterling will __________ and the exchange rate of the
U.S. dollar will ___________.
a. Strengthen; strengthen
b. Weakened; strengthen
c. Strengthen; weakened
d. Weakened;weakened

1. If the US dollar weakens against the Swiss franc,

a. Swiss goods will be more expensive in the US.
b. US goods will be cheaper in Switzerland.
c. Swiss goods will be cheaper in the US.
d. Answers A and B are correct
2. The purchasing power equilibrium theory explains changes in exchange rates by
assuming that exchange rates balance _____________ changes.

a. The balance of payments of the two countries

b. Current balance of the two countries
c. The class policy of the two countries
d. The price level of both countries

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3. In the long run, an increase in domestic prices (relative to the foreign price level)
___________ the value of the domestic currency, while an increase in domestic
productivity ___________ the value of the currency.

a. increase; increase
b. reduce; increase
c. increase; reduce
d. reduce; reduce
4. Which of the following is a reason why the purchasing power parity theory does not
fully explain exchange rate movements?
a. Not all countries' products are exactly the same
b. Monetary policies differ between countries
c. Some goods are not traded internationally
d. Answers A and C are correct
e. Answers A and B are correct
Exercise No4: Discuss the following questions.
1. The president of the United States announces that he will reduce inflation with a new
anti-inflation program. If the public believes him, predict what will happen to the
exchange rate for the U.S. dollar?
2. If the British central bank prints money to reduce unemployment, what will happen to
the value of the pound in the short run and the long run?
3. If Mexicans go on a spending spree and buy twice as much French perfume, Japanese
TVs, English sweaters, Swiss watches, and Italian wine, what will happen to the value
of the Mexican peso?
4. If expected inflation drops in Europe so that interest rates fall there, predict what will
happen to the exchange rate for the U.S. dollar
5. If the inflation rate of the European Union decreases compared to the United States,
how will it affect the exchange rate of the euro?
Exercise No. 5 Problem exercise
1. Calculate the following cross rates.
USD GBP CAD EUR AUD JPY CHF
USD 1 £0.64382
$1.5532
GBP 1
4

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$0.7561
CAD 1
2
EUR $1.1304 1
$0.7188
AUD 1
5
JPY €0.007376 1
CHF £0.664745 1

2. Calculate the Bid-Ask Spread for the following rates.

Bid rate Ask
GB
1.33 1.4
P
JPY 0.0044 0.0066
3. An investor in Canada purchased 100 shares of IBM on January 1 at $93.00 per share.
IBM paid an annual dividend of $0.72 on December 31. The stock was sold that day
as well for $100.25. The exchange rate was $0.68 per Canadian dollar on January 1
and $0.71 per Canadian dollar on December 31. What is the investor’s total return in
Canadian dollars?
TRANSLATE THE FOLLOWING KEY WORDS AND DISCUSS THE MEANING!!!
1. Appreciation 12. Real exchange rate
2. Capital mobility 13. Spot exchange rate
3. Depreciation 14. Spot transactions
4. Effective exchange rate index 15. Tariffs
5. Exchange rate 16. Theory of purchasing power parity
6. Foreign exchange market
7. Forward exchange rate
8. Forward transactions
9. Interest parity condition Time: 90 minute
10. Law of one price Teacher’s name:
11. Quotas Date........./……../…….

FIN122-Fundamental of financial institutions