B14

Question 1

What happens to exports when a countrys currency depreciates

Answer 1

Goods become cheaper for forigners and so they consume more

Question 2

What happens to imports when a countrys currency apreciate

Answer 2

The denisens find imports cheaper so they consume more of those

Question 3

what is interbank trading

Answer 3

forign currency trading among commerical banks, a major component of the forign exchange trade

Question 4

What are the role of banks in forign exchange

Answer 4

They have a lot of currency and therefor they are the best ones to trade with

Question 5

Name some major actors on forign exchange markets except commercial banks

Answer 5

Multinational companies, central banks and nonfinancial institutions such as pension funds, insurance companies and hedge funds

Question 6

Why does an actor that wish to exchange francs for sheckles first exchange the francs for dollars

Answer 6

Because it is easyer and thus cheaper to find someone who wants to trade dollars for sheckles and francs for dollars. Thus the US dollar is a vehickle currency

Question 7

what are spot exchange rates

Answer 7

The price for trading one currency for another right now, on the spot

Question 8

What are forward exchange rates

Answer 8

Prices for exchange in the future, the day they are exchanged is called the value date

Question 9

What do you do if you hedge a forign currency risk

Answer 9

You make a future exchange and thus ensure that your intended trade wont be effected by fluctuations in the foreign exchange rate

Question 10

What is a foreign exchange swap

Answer 10

A spot sale of currecny combined with a forward repurchase of that currency, a good way to avoid brokerage fees

Question 11

What is a futures contract

Answer 11

You buy a contract to receive a certain amount of currency at a specific data that you can sell for a profit if future outlooks change

Question 12

What is a foreign exchange option

Answer 12

The right to buy and sell a specific amount of currency at a specific price up to a date, the options seller is required to honor the deal and buy or sell what you want

Question 13

What do investors value except real rate of return

Answer 13

low risk and high liquidity

Question 14

What is a forign currencys interest rate

Answer 14

The interest a person can earn for lending a unit of currency for a year

Question 15

how do you calculate the currency 1 rate of return on currency 2 deposits

Answer 15

currency 2 interest rates + depreciation rate of currency 1 against currency 2

Question 16

When are forign exchange markets in equalibrium

Answer 16

When all participants willingly hold the currencies they want aka they all have the same expected rate of return

Question 17

What is the interest parity condition

Answer 17

That forign exchange markets are in equalibrium when all are seen as assets of equal value

Question 18

What effect does the spot rate have on the expected return on the forign currency

Answer 18

if the spot rate increasese the invstment looks less attractive as the expected rate of return decreases

Question 19

If interest rates rise what happens to the exchange rate

Answer 19

it apreciates

Question 20

what happens if people expect that the exchange rate will rise in the future

Answer 20

it apreciates

Question 21

What is the carry trade

Answer 21

The investoment strategy of borrowing in a cheap currency and investing it in currencies with high interest rates.

Question 22

Does the carry trade disprove the interest parity condition

Answer 22

No becouse the exchange rate also depends on expectations so the carry trade is prone to crashes

Question 23

What does it mean to cover your investment

Answer 23

When you exchange for a currency and sell the proceeds of your investments forward

Question 24

how do you calculate the forward premium aka the forward discount in currency 1 against currency 2

Answer 24

interest rate on currency 1 deposits - currency 2 deposits