# Foreign Direct Investment Trade and Geography Essay

620 WordsMay 7, 20143 Pages
1. Define the terms “spot exchange rate”, “forward exchange rate”, and “effective exchange rate”. The spot exchange rate refers to the current exchange rate. The forward exchange rate refers to an exchange rate that is quoted and traded today but for delivery and payment on a specific future date. Effective Exchange Rate is an index that describes the relative strength of a currency relative to a basket of other currencies 2. Suppose the exchange rates between the British Pound and various major currencies in the first and second quarter of 2012 are as follows:  1st quarter: £0.6/US\$; £0.85/EUR; £0.0063/¥; £0.7/SFr. 2nd quarter: £0.65/US\$; £0.82/EUR; £0.0070/¥; £0.74/SFr. Assume that the weights of the different currencies in the currency basket are as follows: US\$: 30%, Euro: 30%, Japanese Yen:20%; Swiss Franc: 20%. Has the British Pound effectively depreciated or appreciated between the first and the second quarter of 2012? condition | £/US\$ | £/EUR | £/¥ | £/SFr | 1st quarter | 0,6 | 0,85 | 0,0063 | 0,7 | 2nd quarter | 0,65 | 0,82 | 0,007 | 0,74 | | depreciated | appreciated | depreciated | depreciated | 3. You are interested in buying a certain book. At Amazon-US the book costs 25\$. At Amazon- Europe the exact same book costs 18 Euros. Suppose the current exchange rate between the U.S. Dollar and the Euro is 0.8 Euros per Dollar. (a) Based on the information above, calculate the real exchange rate. What does the number you derived imply? Amazon US | Amazon Euro | Real exchange rate | 25 | 18 | 0,576 | (b) Assume that one year later the real exchange rate calculated from book prices is 0.9. Which area (U.S. or Europe) has become more competitive in the book market? Condition | Amazon US | Amazon Euro | Current real exchange rate | 1 Yr later real ex. rate | Current price | 25 | 18 | 0,576 | 0,9 | 1 year later price | 39,0625