As a foreign exchange trader, ho w would you react to each of th e following new

Question

As a foreign exchange trader, ho

w would you react to each of th

e following news items as it flashes on your

computer screen? Explain why you

would react that way. (5 point

s each)

a.

Mexico's oil reserves prove to be much smaller that touted earl

ier.

b.

The Social Credit Party wins the

national elections in Canada a

nd promises generous

expansion of the

supply of money and credit.

c.

In a surprise vote the Swiss go

vernment passes a law that will

result in a large increa

se in the taxation of

interest payments from Swi

tzerland to foreigners.

Explanation / Answer

1.
Oil reserves are considered to be an asset for the country. If it is found to be smaller, then there is a case of negative pressure (depreciation) upon the domestic currency of Mexico. I will go on to buy major foreign currencies and sell off all the domestic currencies ( if any ) so that I can gain the more number of domestic currencies after it absorbs the news and depreciates full according to the news.
2.
Generous expansion of money supply and credit will create inflationary pressure and the purchasing power of the domestic currency will come down. Hence, the domestic currency will depreciate against all major foreign currencies. In this scenario, I will buy the major foreign currencies and sell the domestic currency to limit the loss and achieve gains when I convert back the foreign currencies into the domestic currency after some time.
3.
It will reduce the interest payment to the foreign investors. As a result, the investors will change their investment in the foreign currencies and supply of domestic currency will increase. It will lead to the deprecation of the domestic currency. In this scenario, I will buy the foreign currency and sell the domestic currency.

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