Ch 14 Flashcards
When a country’s currency depreciates
Foreigners find that exports are cheaper and domestic residents find that imports from abroad are more expensive
Foreign Exchange Market
Market in which households, firms, and institutions buy and sell foreign currencies to make international payments
Why is the dollar regarded as a vehicle currency?
The dollar is sometimes called a vehicle currency because of its pivotal role in many foreign
exchange deals.
How is the exchange rate denoted?
E $/€
Depreciation/appreciation 
The decrease or increase in value of currency relative to another currency
What does it mean when a currency has depreciated? 
Imports become more expensive for that country and exports become cheaper 
Foreign exchange markets 
Set of markets where foreign currencies and other assets are exchanged for domestic ones (NO ROOM FOR ARBITRAGE)
What is a vehicle currency?
A currency used widely for international transactions by parties, who don’t reside in the currency’s country
Who are the participants of foreign exchange market? 
Commercial banks, corporations, non-bank, non-bank financial institutions, and the central bank
What are spot rates and forward rates?
Spot = Exchange Rates for currency in the present
Forward = “…” that will occur at a future forward date
Foreign exchange swap 
Combo of a spot sale with a forward purchase
Futures contract + how does it differ from forward?
Designed by a third-party for a standard amount of foreign currency, delivered or received on the standard date (CAN be bought + sold at any time before exp date, unlike forward)
What affects demand of currency deposits?
Rate of return, risk, and liquidity
Real rate of return
Inflation adjusted ROR representing additional goods and services that can be bought with earnings from the asset.
Currency deposit interest rate
Amount earned by lending unit of currency for a year (ROR for deposit in domestic currency is interest earned)
