Our text defines foreign exchange market (FX) as encompassing the conversion of purchasing power from one currency into another, bank deposits of foreign currency, the extension of credit denominated in a foreign currency, foreign trade financing, trading in foreign currency options and futures contract, and currency swaps. (Eun, Resnick,2015). The foreign exchange market is the market in which participants are able to buy, sell, exchange and speculate on currencies. Foreign exchange markets are made up of banks, commercial companies, central banks, investment management firms, hedge funds, and investors. Numerous factors determine exchange rates, and all are related to the trading relationship between two countries. Exchange rates are relative, and are expressed as a comparison of the currencies of two countries. Interest rates, inflation and exchange rates are all highly correlated. By manipulating interest rates, central banks exert influence over both inflation and exchange rates, and chan
ging interest rates impact inflation and currency values. gher interest rates offer lenders in an economy a higher return relative to other countries. References Eun, C. S., & Resnick, B. G. (2015). International financial management (7th ed.). New York: McGraw-ll Irwin. ISBN: 9780077861605 The problem situation is summarized as follows: A/P = £35,000 payable in three months NY = 0.35%/month, compounding monthly LD = 2.0% for three months S = $1.45/£; F = $1.40/£. Option a: When you buy £35,000 forward, you will need $49,000 in three months to fulfill the forward contract. The present value of $49,000 is computed as follows: $49,000/(1.0035)3 = $48,489. Therefore, the cost of Jaguar as of today is $48,489. Option b: The present value of £35,000 is £34,314 = £35,000/(1.02). To buy £34,314 today, it will cost $49,755 = 34,314×1.45. Thus the cost of Jaguar as of today is $49,755. I would definitely choose option a, and save $1,266, which is the difference between $49,755 and $48489.