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Summarize the fundamental equilibrium path

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Question 1. . In your own words, propose it's significance.
Question 2. Compare and contrast foreign currency futures options and currency options.
Question 3. Examine the meaning of over shooting and how is it corrected.
Question 4. Analyze and propose the major differences of interest rates swaps and currency swaps.

Each question needs to be 200 words and the book that I am using is Fundamentals of Multinational Finance by Moffett, Stonehill, & Eiteman.

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Solution Summary

This response provide guidelines about understanding about what is fundamental equilibrium path and it's significance. Also, international finance concepts currency futures options and currency options. overshooting and are interest rates swaps and currency swaps are discussed.

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Fundamental Equilibrium Path
Fundamental equilibrium path (FEP) is an artificial path that is defined by economists and traders of currency. This path limits the up and down movements of a currency against other currency as a result of random external events and impact of different short term forces (Carbaugh, 2014). Following is the diagram for fundamental equilibrium path:

But, it is necessary for the drawing of FEP that there should not be official interference of the government or other regulatory bodies in value of the currency (Haslach, 2011).
Significance of FEP
Through use of FEP, currency traders and market analysts takes decisions regarding purchase or sell of currencies. It helps in predicting the movement of a currency at any point of time by identifying the current state of currency over graph (Carbaugh, 2014). In trading companies and broking firms, FEP is used by technical analysts for providing their decision regarding probable movement of currency through considering necessary factors for helping investors. At the same time, it is significant for importers and exports in case of hedging activities for safeguarding business from currency fluctuations (Waszczyszyn, et al, 2013).
Answer 2
Comparison between Foreign Currency Futures Options and Currency Options
Both foreign currency futures options and currency options are financial derivative instruments that are used for minimizing the exposure associated with fluctuation in currency exchange rate (Ajami, et al, 2014). In addition, both these are advance form of Forex trading instruments, which require special training and hiring of specialist in the field for taking advantage from the trading of same. Another similarity between foreign currency future options and currency options is that both are used by entrepreneurs (e.g. importers and exporters) as hedging instruments for safeguarding their earnings from currency rate fluctuations. Purchase of both future and options contracts require ...

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