1. a) Define and explain: fixed exchange rate regime and floating exchange rate regime. What are the main differences between these two?

b) Consider you are a risk-averse investor in foreign exchange rate market. You have two types of contracts you can use while investing in this market: forwards and spot contracts. Which one do you prefer and why? Briefly explain.

2. Suppose 30 % of home trade is with country 1 and 70 % is with country 2; Homes currency appreciates 15 % against country 1 but depreciates 20 % against country 2. What is the change of effective exchange rate for home country? Show your work.

Please answer in full sentences. Thank you!