1. Exchange rates can be explained by different underlying theories. Explain briefly any three of these theories, along with mathematical formulas, where applicable.
2. There are short term and long term fluctuations in Exchange rates, and various factors are responsible for this. Explain the eight factors and whether they contribute to long or short term fluctuations.
3. An exporter has Eur 10 million receivable in 3 months, and is in a dilemma whether to book forward contract to sell Euro or to sell Eur-INR 3 month futures.
a. Explain to him in a tabular form the characteristics and differences between Forward and Futures.
b. Then with an example (assume 3 months forward and futures rate of Eur/INR 79) explain the cash flows in either situation.