Share
Explore BrainMass

exchange rates

Need your help with these questions. Most of them are basic logic but some may require a source or two.

1. Why it is necessary to understand what determines exchange rates?
2. Which are the main differences between a currency forward market and a futures market?
3. Which are the major currencies floating against each other in the global markets?
4. Is it a good idea for a country to pay off its foreign debt? Explain.

Solution Preview

1. Why it is necessary to understand what determines exchange rates?

It is necessary to understand the factors that impact or determine exchange rates in order to avoid the risks due to sudden fluctuations in exchange rates. Such understanding will help to mitigate the negative impact of sudden fluctuations in exchange rate by taking adequate steps in advance. For example, if one knows that political instability can cause currency of a country to weaken, he/she can take adequate steps such as hedging in advance to avoid possible losses due to uncertain political events in any particular country.

Thus, in order to minimize the uncertainties and risks arising in international business transactions, it is extremely important to understand the factors that determines exchange rates.

2. Which are the main differences between a currency forward market and a futures market?

Forward transaction: One way to deal with the Forex risk is to engage in a forward transaction. In this transaction, money does not actually change hands until some agreed upon future date. A buyer and seller agree on an exchange rate for any date in the future, and the transaction occurs on that date, ...

Solution Summary

Why it is necessary to understand what determines exchange rates?

$2.19