15.1: Foreign Exchange Rates Flashcards
- The nominal exchange rate tells …
How much foreign currency can be exchanged for a unit of domestic currency.
- The real exchange rate tells how much the … and … in the … country can be exchanged for the goods and services in a … country.
- The real exchange rate tells how much the goods and services in the domestic country can be exchanged for the goods and services in a foreign country.
- Purchasing power parity (PPP) - describes that …
The purchasing power of different currencies is equalized for a standardized basket of goods.
How do you calculate foreign price level in domestic currency?
Foreign price level in domestic currency = Sd/f × Pf
Where:
Sd/f is the spot exchange rate
How do you calculate real exchange rate?
Real exchange rate (d/f) = (Sd/f × Pf)/Pd = Sd/f × (Pf/Pd)
What are the forward contracts?
Any exchange rate transactions that occur with currency settlement longer than the usual T + 2 settlement for spot delivery.
FX swap is a combination of …
A combination of two transactions that involves a Spot transaction to offset (settle) the expiring Forward contract and a new forward contract to be set at a new, more distant settlement date.
- In professional FX markets, forward exchange rates are typically quoted in terms of …
Points (also sometimes referred to as “pips”).
- The points on a forward rate quote are simply the …
Difference between the forward exchange rate quote and the spot exchange rate quote, with the points scaled so that they can be related to the last decimal in the spot quote.
The base currency is said to be trading at a forward premium when?
- When the forward rate is higher than the spot rate, the points are positive.
The base currency is said to be trading at a forward discount when?
The forward rate is less than the spot rate, the points (forward rate minus spot rate) are negative.
