5: Currency Exchange Rates

Question 1

The relationship between:
* the bank and the client
* the size of the trade
* the time of day the trade is initiated
* the currencies involved
* the level of market volatility

Answer 1

significant factors in determining the spread

Question 2

The FX carry trade seeks to profit from the failure of:

Answer 2

failure of Uncovered Interest Rate Parity

Producing: negatively skewed, fat tails

Question 3

Evaluates the impact of monetary & fiscal policies on interest rates and exchange rates

Answer 3

Mundell-Fleming model of exchange rate determination

Question 4

Model assumes that output is fixed, and monetary policies primarily affect inflation, which affects exchange rates

Answer 4

Monetary Models

Question 5

Purchasing Power Parity holds at any point in time

Answer 5

Pure Monetary Approach

Question 6

Early warning signs of currency crisis:
* Terms of Trade:
* Money Supply (M2):
* Foreign exchange reserves:

Answer 6

• Terms of Trade: exports/imports decrease
• Money Supply (M2): M2= money supply/bank reserve increase
• Foreign exchange reserves: dramatically decline

Question 7

Ex Ante version of PPP exerts that the expected changes in the spot exchange rate are entirely driven by:

Answer 7

expected differences in national inflation rates

Question 8

The amount by which exchange rates must adjust to restore current account to balanced positions depends on:

The impact of the currency depends on:

Answer 8

imports & exports
* initial gap between imports & exports
* repsponse of import & export prices to changes in the exchange rate
* response of import & export demand to changes in import & export prices