chap 2 Flashcards
what is effective ER?
It is the inclusion of international trade weights in to ER
what is a fixed ER (or pegged)
the government control ER by putting a artificial ER (fix) or by coping other currency (peg)
what is floating ER?
the government don’t intervene , so it fluctuate fast
what is a spot contract?
the immediate exchange of currency
what is derivatives?
It are types of contract with the aim to a future ER .
It is form to secure a stable ER or to gamble
what the derivatives include ?
- forwards
- swaps
- futures
- options
what is a forwards contract?
- it is a contract that is settle today but the settlement date is in the future
what is ER?
it is the price of some foreign currency in terms of a home currency
what happens when home ER deprecated?
home export become less expensive
imports More expensive
what is managed float?
goverment intervene only to prevent exercise fluctuation
what is a swaps in foreign exchange derivatives?
It is the combination of a spot sale with a forwards contract to reduce transaction cost
what is a future in foreign exchange rate?
It is a promise that two parties hold in respect to a contract of delivery of currencies
the differences with forwards contract is that contracts are standardize , traded and specific maturity date
what is options in a foreign exchange rate?
provide the option to buy or sell a currency in a pre -specified date (more freedom to choose best ER)
what is the meaning of covered interest rate (CIP)?
it is the use of forwards to cover ER risk
return on $ deposits = return on euros deposits
formula of meaning of covered interest rate (CIP)
(1 + I$) = (1 + iEU) x (F / ER )
I : interest rate
F : forwards ER
ER: exchange rate
the differences of
Profit = (1 + iEU) x (F / ER ) - (1 + I$)
