Exchange Rate, Banking Procedures and Services, Policy and Interest Rate

Use Formula: F = S (1+) (1+)

F = forward rate

S = spot rate

i = interest rate

Question 1

The Fijian Dollar is currently trading for AUD 2.55. if the interest rate in Australia is 5.5% and the interest rate in the New Zealand is 6.5%, what would be the one-year forward exchange rate?

Explain your answer

Question 2

Suppose the spot price of one FJD is 2.5641 Australian Dollars. The interest rate in Australia is i = 6% and the interest rate in the New Zealand is i * = 3.5%. The forward exchange rate implied by interest rate parity (IRP) condition is? Explain your answer

Question 3 (Long Answer Question)

a) Explain Exchange Rate Risk?

b) Explain the 3 components of Exchange Rate Risk?

c) In market participants in a foreign exchange market has three groups based on their motives for foreign exchange trading:

i) Arbitrageurs

ii) Hedgers

iii) Speculators

Explain the three groups in detail and give examples?

Question 4 (Definition and Mathematical Explanation)

a) Explain what a fixed exchange rate is and give numerical example using values.

b) Explain what a floating exchange rate is and give numerical example using values.

Question 5

Write a brief summary outlining difference between Simple Interest Rate and Compound Interest Rate?

Question 6

a) Use Formula, Interest = Pin

P = Principal sum borrowed

i = simple interest rate

n = number of periods

Jamesa gets a loan from his mum to buy a cheap secondhand car. His mum lets him have $5000 for 4 years at 5% simple interest rate. Jamesa contracts to pay interest to his mum annually and to pay back the debt at the end of the four years.

i) How much is the annual interest?

ii) How much is paid at the end of year four?

b) Use formula PV = FV/(1+in)

PV = Present Value

FV = Future Value

i = simple interest rate

n = number of periods

ANZ supplies 91-day commercial bill finance to a customer. The face value of the bill is $100,000 and the nominal annual interest rate is 6.2%.

i) How much does the customer receive?

Question 7

a) Prepare a simple balance sheet for a bank.

b) List 3 assets, 3 Liabilities and 3 Equities.

c) Explain each of the items you listed under asset, liabilities and equity and provide details of why it is considered to be under different category.

Question 8 -

Define each statement, provide necessary graphs and provide example to each definition

a) Bank Overdraft

b) Spot Rate

c) Forward Rate

d) Reserve Ratio

e) Clearing House