We care about foreign exchange and exchange rates for several reasons.
First, purchasing goods and services produced by the labor force in another country generally requires first purchasing the other country’s currency. The buyer sells one’s own currency for the currency of the country with the buyer, or the MNC would like to transact.
Second, MNCs care about the changes in exchange rate because a change in the exchange rate makes payables or receivables in domestic currency smaller or larger regarding their home currency.
Lastly, you the investor care about FX and exchange rates if you have foreign assets in your portfolio. You want to buy currency low and sell high which means you would be interested in the direction and how much exchange rates change.
In this assignment, explain the following in an essay:
- A brief summary of how FX markets operate, including the bid-ask spread, cross-exchange rate, and forward rate.
- Include at least one example of calculating the forward discount or premium using American term quotations. For simplicity, assume 30 days in each month and use the formula (where ¥ can be any currency, and N = 3 means a 3-month delivery and so days = 90, for example) below. What can you infer from your calculations?Use the prevailing spot rates in your writing and include a corresponding citation so that the calculations are reproducible using your data.
- MNCs use three major FX derivatives: forward, futures, and options. Explain why MNCs use them. Identify the purposes of FX derivatives and highlight the differences between them.
Your submission should be at least four pages of analysis plus a reference page in Microsoft Word, APA formatted, and with correct grammar.