B14 Flashcards
Exchange rates and foign exchange markets
What happens to exports when a countrys currency depreciates
Goods become cheaper for forigners and so they consume more
What happens to imports when a countrys currency apreciate
The denisens find imports cheaper so they consume more of those
what is interbank trading
forign currency trading among commerical banks, a major component of the forign exchange trade
What are the role of banks in forign exchange
They have a lot of currency and therefor they are the best ones to trade with
Name some major actors on forign exchange markets except commercial banks
Multinational companies, central banks and nonfinancial institutions such as pension funds, insurance companies and hedge funds
Why does an actor that wish to exchange francs for sheckles first exchange the francs for dollars
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
what are spot exchange rates
The price for trading one currency for another right now, on the spot
What are forward exchange rates
Prices for exchange in the future, the day they are exchanged is called the value date
What do you do if you hedge a forign currency risk
You make a future exchange and thus ensure that your intended trade wont be effected by fluctuations in the foreign exchange rate
What is a foreign exchange swap
A spot sale of currecny combined with a forward repurchase of that currency, a good way to avoid brokerage fees
What is a futures contract
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
What is a foreign exchange option
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
What do investors value except real rate of return
low risk and high liquidity
What is a forign currencys interest rate
The interest a person can earn for lending a unit of currency for a year
how do you calculate the currency 1 rate of return on currency 2 deposits
currency 2 interest rates + depreciation rate of currency 1 against currency 2
When are forign exchange markets in equalibrium
When all participants willingly hold the currencies they want aka they all have the same expected rate of return
What is the interest parity condition
That forign exchange markets are in equalibrium when all are seen as assets of equal value
What effect does the spot rate have on the expected return on the forign currency
if the spot rate increasese the invstment looks less attractive as the expected rate of return decreases
If interest rates rise what happens to the exchange rate
it apreciates
what happens if people expect that the exchange rate will rise in the future
it apreciates
What is the carry trade
The investoment strategy of borrowing in a cheap currency and investing it in currencies with high interest rates.
Does the carry trade disprove the interest parity condition
No becouse the exchange rate also depends on expectations so the carry trade is prone to crashes
What does it mean to cover your investment
When you exchange for a currency and sell the proceeds of your investments forward
how do you calculate the forward premium aka the forward discount in currency 1 against currency 2
interest rate on currency 1 deposits - currency 2 deposits
