Your bank has a sign saying €/£ Bank sells 1.35 Bank buys 1.41 Commission £2. If you wanted €1,000 you would pay:
£711.22
£742.74
£1,352
£1,412
If the $/£ rate is 1.38 then $1 is worth:
72.5 pence
£1.38
€/£ is 1.42 and $/£ rate is 1.38 the €/$ rate will be:
.725
.74
.97
1.03
The €/£ spot is 1.35 - 1.40 and the forward discounts are: 1 month 3.50 - 3.75 3 months 5.30 - 5.45 The 3 month forward rate is:
1.315 - 1.3625
1.403 - 1.4545
1.70 - 1.775
1.88 - 1.945
The fact that there is a forward discount in question 4 means that:
It is expected that the € will strengthen against the £
It is expected that the £ will strengthen against the €
It is just a way of allowing for the time value of money
Which of the following is not normally a factor in the level of FX rates:
The level of the main stock exchange index
Supply and demand for currencies
Interest rates
Inflation
The law of one price means that:
All goods must be the same price in all countries
All goods must be the same price where there is a common currency such as the Euro-zone
If there were no market imperfections and all goods were portable, there would be a tendency for prices of the same products to be the same in different countries
The cost of shipping goods is irrelevant
It is expected that UK inflation over the next 6 months will be 1.3% and that Japanese inflation over the same period will be 2.1%. If the current ¥/£ spot rate for buying ¥ is 215.3 the six month estimated spot rate will be:
232.52
217
213.58
198.08
The difference between a ’clean’ and a ‘dirty’ float is:
Dirty floats are influenced by criminal activity and require money laundering
Effectively there is no difference
Exchange rates are likely to be more predicable under a clean float system
A clean float is entirely market driven whilst a dirty float is managed by government
Purchasing Power Parity means that
Exchange rates change in line with the rates of inflation in the two countries
Citizens in each country have broadly similar living standards