CH 14 Flashcards
E? ?/?
Exchange rate
Domestic currency/forigen currency
Assests is what?
Asstes are a thing that brings wealth and purchasing power to the holder
The price of an assets is …. what?
a reflection on what value the asset are meant to bring
Exchange rates allows us to…?
compare prices of goods and serivces across countries
If an exchange rate depreciate then…
the its cheaper for forigners to buy domestic countrys goods.
If an exchange rate appreciates then…
Its more expensive to buy goods from the domestic country
The value of a currency is … ?
The price for that currency and the expected return of the currency
E appreciate, then the currency…?
Domestic currency depriciate and forigen currency appreciate in comparsion
E depreciate, then the currency…?
Domestic currency appreciate and forigen currency depriciate in comparsion
relative price is when
x amount of eg. jeans in terms of shirts
dollar against euro, is written as:
euro/dollar
The forigen exchange market shows
the exchange rate, thourgh the deamand and supply of currencies which determine the exchange rate.
When ascertaining a asset, like currency, savers will look at the
highest rates of return, which is determined by the interest rate, expected change in currency exchange rate
risk
liquidity
Equalibrium is meet when
deposits of all currencies offer the same expected rate of return and when interest parity conditions holds (same thing)
Expected return on forigen currency is based on
todays exchange rate
intreste rate
future exchange rate
When currency appreciate or depricitate
The expected domestic currency return on forigen deposits appreciate or depriciate intandem with the curency
The Forexmarket consists of
the exchange rate, rates of return, expected return on forigen deposists, return on domestic deposits
Increase of Intreste rate of domestic currency leads to …
that the schedule return on domestic deposists shifts to the right
Decrease of Intreste rate of domestic currency leads to …
that the schedule return on domestic deposists shifts to the left
Increase of Intreste rate of forigen currency leads to …
that the schedule return on forigen deposists shifts to the right
Decrease of Intreste rate of domestic currency leads to …
that the schedule return on forigen deposists shifts to the left
CIP : ?
R = R* + (F-E/E)
FP ? FP = ?
Forward premium
F-E/E or (F/E) - 1
FR ? FR = ?
Forigen rate
R* + (E(e)/E) - 1
roh?
risk premium on domestic assets
roh=?
FP-E
R-R*
Rate of depreciation
Expected rate of return on forigen donds in domesttic currency
FR
R ?
domestic intreste rate
rate of return when investing in domestic bonds in domestic currency
R* ?
rate of return when investing in forigen bonds in forigen currency
Three theories for exchange rate determination
The balance of payments approach aka. demand and supply for forigen assets
Purchasing power parity theory (PPP)
Asset-market approach (looks at intreste rate)
Short run exchange rate theories
The balance of payments approach and Asset-market approach
expected rate of depreciation
E(e) - E / E
(If result is -% then its an appreciation)
