Question One
By transferring their bank balances to the U.K, Germans will significantly increase demand for the sterling pound, and as a result, its value is likely to increase substantially. An increase in the demand for a currency is likely to increase its value, while a decrease in demand will lower its value. When Germans transfer their money to the U.K, this means they will use the sterling pound more frequently in their transactions. The demand for the sterling pound will, as a result, increase, forcing banks to exchange it at a higher rate. The euro’s value as the main currency used in German will be adversely affected, as its demand is likely to reduce due to a decline in demand.
Question Two
The spot rate refers to the existing market exchange rate that is used in transactions by contracting parties. A transaction that uses the spot rate usually does not involve any negotiation between the parties. The rate used is the prevailing one in the market that both parties involved in the transactions do not have the power to change (Hassan & Mano, 2019). The spot rate may be beneficial to one party and harmful to another based on the value of the transaction as there is no mutual agreement on what rate to use.
The forward rate refers to a rate that is agreed on by contracting parties for a transaction that will take place in the future. The contracting parties may decide to settle on a specific rate to be used in future transactions due to market changes that may adversely affect the rate. The use of a forward rate gives the contracting party the ability to set the rate in advance and avoid possible losses.