What is a floating exchange rate system

Reference no: EM133664259

Problem

Short-answer Questions (1.5 Points Each) Instruction: Answer each of the following questions briefly, specifically, and accurately.

I. What is the difference between American options and European options?

II. What is the difference between NPV and IRR? How do you use NPV rule and IRR rule to determine whether to invest in a project or not?

III. What is a vehicle currency? What currency currently serves as the world's primary vehicle currency?

IV. What is a floating exchange rate system? Compared with other exchange rate systems, is it most or least difficult to quantify the risk of a currency in floating exchange rate system? Why?

V. What are bid and ask rates of currencies? Why are the bid-ask spreads larger in the forward market than in the spot market?

VI. Suppose covered interest rate parity holds. When the US dollar interest rates are higher than the euro interest rates, is the euro selling at a premium or discount relative to the USD in the forward market? Why?

VII. What would be the logical reasons to use a synthetic forward contract to hedge?

VIII. Discuss the differences between systematic risk and idiosyncratic risk.

Reference no: EM133664259

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