Chapter 7 - Dealing with Foreign Exchange

Question 1

Foreign Exchange Rate

Answer 1

the price of one currency in terms of another

Question 2

Appreciation

Answer 2

an increase in the value of a currency relative to another

Question 3

Depreciation

Answer 3

a loss in the value of a currency relative to another

Question 4

The gold standard

Answer 4

a system where the value of most major currencies was maintained by their fixed prices in terms of gold

Question 5

What determines foreign exchange rates?

Answer 5

1. Relative price differences
2. Interest rates and money supply
3. Productivity
4. Exchange rate policies
5. Investor psychology

Question 6

The Bretton woods system

Answer 6

a system in which all currencies were pegged at a fixed rate to the US dollar

Question 7

The post-bretton woods system

Answer 7

a fixed-exchange rate system that tried to create a fixed price for its currency (against gold or other currencies)
- International monetary fund
- New development bank

1971-present
- Currencies can fluctuate based on market forces
- exchange rates shifted from fixed rates to floating rate

Question 8

Solutions for currency fluctuations (what can firms do?)

Answer 8

1. Invoicing their own currencies
2. Currency hedging
3. Strategic hedging