Essays on Foreign Exchange Markets Assignment

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The paper "Foreign Exchange Markets" is a perfect example of a marketing assignment. Why Australia uses indirect quote- in reality, about 89% of the world currencies are quoted directly given that the US dollar is the dominant currency. However, there is no regulation that guides whether a country should use direct or indirect quotes (Balasubramaniam, 2016). For Australia, the main reason why the indirect quote is used is because Australia is a commonwealth country but not any regulation. The Euro and Commonwealth currencies like the Australian dollar are the exceptions to using direct quotes since they are typically quoted indirectly. The quote in Australia is US$0.736.

This means that one Australian dollar is worth 0.736 Australian dollars. To convert Australian dollars to USD, we multiply by the exchange rate. Formula: Convert US$0.736 to direct quote I USD = 1/0.736 AUD 1 USD = 1. 359 AUD To convert AUD to USD, divide by the direct quote rate (Weithers, 2016) USD = AUD/ Direct quote rate USD = AUD/1.359 = AU$100,000/1.359 = US$73,583.52. The British Pound quote of 1.523-33 means that you can buy 1 pound for 1.533 dollars and you can sell one pound for 1.523 dollars. If you converted $ 15,000 to British pounds and then back to US$, its value in USD will be given by Number of pounds = Number of dollars /ask price = $15,000/1.533 = 9,784.74 British Pounds Then we convert the British pounds back to US$ Number of dollars = Number of British pounds*Bind price = 9,784.74*1.523 = US$14,902.15 Thus, if you converted $15,000 to British pounds and then back to US$, its value in US$ would be US$14,902.15. If you buy pounds at the bid rate and sell them at the asking rate One pound at the bid rate = Number of dollars /Bid rate = 1/1.523 1 pound at bid rate = 0.657 dollars Thus, at bid rate, we buy = 15,000*0.657 = 9,848.98 British Pounds Then we sell them at asking rate = Number of pounds* Ask rate = 9,848.98* 1.533 = 15,098.49 Thus, if you are able to buy pounds at the bid rate and sell them at the asking rate, you will get $15,098.49. The number of pounds that you need to earn $1,500 on a round trip transaction (buying pounds for US$ and then selling the pounds for US$) is given by; Number of pounds = Intended profit/difference in bid and ask price Difference in bid and ask price = 1.533-1.523 = 0.01 Thus, the number of pounds needed to make $1,500 profit = $1,500/0.01 = 150,000 British pounds (Krugman, 2009).

References

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Balasubramaniam, K2016, Why isn’t the EUR/USD currency pair quoted as USD/EUR? Retrieved on 2nd September 2016, from;

http://www.investopedia.com/ask/answers/06/eurusd.asp

Weithers, T2016, Foreign exchange: A practical guide to the FX markets, New York, John & Sons.

Krugman, O2009, International economics, New South Western, Pearson Education Inc.

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http://peopleof.oureverydaylife.com/functions-foreign-currency-exchange-markets- 9293.html

Currencyexchangemarket.net, 2016, Currency exchange markets participants, Retrieved on 2nd September 2016, from;

http://www.currencyexchangemarket.net/role-currency-exchange-market- participants.html

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http://nptel.ac.in/courses/110105031/pr_pdf/module%204.pdf

Contessi, S2016, Why would a firm want to become a multinational? Retrieved on 2nd September 2016, from;

https://research.stlouisfed.org/publications/regional/09/10/reader_exchange.pdf

Scribd.com, 2016, Why firms become MNC’s? Define nature and characteristics of MNC’s? Retrieved on 2nd September 2016, from;

https://www.scribd.com/doc/191523872/Why-Firms-Become-MNC

Economicsonline.co.uk, 2016, Purchasing power parity, Retrieved on 2nd September 2016, from;

http://www.economicsonline.co.uk/Global_economics/Purchasing_power_ parity.html

Investopedia.com, 2016, Absolute and relative purchasing power parity, Retrieved on 2nd September 2016, from;

http://www.investopedia.com/exam-guide/cfa-level-1/global-economic- analysis/absolute-relative-purchasing-power-parity.asp

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