Chapter 12

Question 1

The real sector

Answer 1

Where we trade goods and services

Question 2

The financial sector

Answer 2

Global financial markets

Question 3

Foreign exchange market

Answer 3

A market where currencies are bought and sold

Question 4

The different foreign exchange trading centers

Answer 4

Decentralized units of a single global foreign exchange market

Question 5

Worlds largest currency exchange center

Answer 5

London

Question 6

Commercial banks

Answer 6

Engang in foreign exchange transactions on behalf of their clients

Question 7

Interbank trading

Answer 7

A bank buy and sell currencies to other banks

Question 8

Nonbank Financial Institutions

Answer 8

Play a substantial role in the foreign exchange market

• hedgefunds, mutual funds, insurance companies and pension funds

Question 9

The bid-ask spread

Answer 9

The difference between the buying price and the selling price

Question 10

Nonfinancial Businesses

Answer 10

Primarily include corporations that operate in several countries.

Example: General Motors

Question 11

Central Banks

Answer 11

Often carry out foreign exchange market interventions in order to prevent unwanted fluctuations in the value of the country’s currency relative to other currencies

Question 12

Direct or American terms

Answer 12

Exchange rates written in terms of US dollars per unit of the other currency

Question 13

indirect or European terms

Answer 13

Exchange rates are written in terms of units of a foreign currency per US dollar

Question 14

Exchange rates

Answer 14

Prices of currencies

Question 15

Demand for a currency

Answer 15

Comes from residents or other countries who desire to buy a country’s goods or services or to invest in a country’s assets

Question 16

Supply for a currency

Answer 16

Comes from a country’s residents desire to buy goods and services or investments in other countries

Question 17

Depreciation of a currency

Answer 17

Occurs when the amount of another currency required to purchase one unit of the currency decreases.

Example: Japanese Yens price of the US dollar falls

Question 18

Appreciation of a currency

Answer 18

Occurs when the amount of another currency required to purchase one unit of the currency increases

Example: When the yen price of the US dollar increases

Question 19

Spot transaction

Answer 19

One where parties agree to an exchange of currencies and delivery of currencies “immediately”.- up to two days

Question 20

Spot rates

Answer 20

Exchange rate in spot transactions

Question 21

A forward contract

Answer 21

specifies a future date for delivery of foreign exchange

Question 22

Forward exchange rate

Answer 22

The exchange rate that apply to forward contracts

Question 23

The value date

Answer 23

The future date of a foreign exchange delivery