Question 5 a) Importers, exporters, investors and borrowers may all be participants in the FX markets....

Question 5
a) Importers, exporters, investors and borrowers may all be participants in the FX markets. Explain
why each of these parties would be involved in FX market transactions. [5 marks]
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b) A German importer has entered into a contract under which it will require payment in GBP in
one month. The company is concerned at its exposure to foreign exchange risk and decides to
enter into a forward exchange contract with its bank. Given the following data, calculate the
forward rate offered by the bank. (Both countries use a 365-day year; assume 30-day contract.) [5
marks]
Hint: The quote is from the perspective of the dealer relative to the base currency.
EUR/GBP (spot): 0.8260–67
One-month German interest rate: 4.75% p.a.
One-month UK interest rate: 3.25% p.a.

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Expert Solution

Answer 5(a)

Importers, exporters, investors and borrowers may all be participants in the FX markets. The followings are the reasons or explanations for becoming participants of FX market-

- Importer

Importer may have to pay amount to supplier for importing goods or service in different foreign currency, value of currency is continue changing.Importer wants to get secure from any loss to enter foreign currency transaction like hedging to secure their payment in future without bearing losses.
For the transaction Exposure
To cover itself from any loss in future due to change in currency & he may require to pay more in future
Importer Fears to increase in currecy thats why he enters in FX market for undertaking transaction like hedging through future, option, money market cover or enter in forward contract

- Exporters

Exporter fears to fall in currency value. He recives the consideration from importers in different currency, if currency fall from the date of contract then exporter will be in loss position. To cover the loss he enters in FX Market and cover their risk by entering in forward contracts, furures , options etc

- Borrower

A borrower, borrows the money from others in different currency then if currency change to his disadvantage then he may have to pay loan more than the initial loan amount. To cover this situation he beomes the paricipants of FX Market through entering reverse Contracts.

-Investor

Investor, invest the money in FX market to get higher return.He buys te currency of one country and selling that of another.
For example Mr. A buy US Dollar and sell british pounds or vice versa and get the exchange gains.

Answer 5(b)

30Days Forward rate will be EUR/GBP =0.8257-70

ekkarill92 answered 1 year ago

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