Chapter 9 Flashcards
to investigate the short-run determination of exchange rates, the____ is used.
asset market approach i
reducing a firm’s exposure in foreign exchange risk may include hedging in the
forward exchange markets, money markets and currency future markets.
foreign exchange rates are influenced by:
a. inflation rates
b. differences in interest rates
c. government policies
d. expectations of foreign exchange markets participants
rates changes continuously and is determined by the foreign exchange market.
Flexible exchang
FACTORS THAT AFFECT EXCHANGE RATES IN THE LONG RUN
Relative Price Levels
a rise in a country’s price level causes its currency to depreciate.
Trade barriers
a fall in the country’s relative price level causes its currency to appreciate.
Preferences for Domestic vs. Foreign Goods
increase in the demand for a country’s exports causes it currency to appreciate, conversely, increase for import causes the domestic currency to depreciate.
Productivity
as a country becomes more productive relative to other countries, its currency appreciates.
the indirect computation of the exchange rate of one currency from the exchange rates of two other currencies.
Cross rates
current method of exchange rate determination.
During periods of extreme fluctuation in the value of a nation’s currency, intervention by governments or central banks may occur to maintain fairly stable exchange rates.
Managed Float
rates rarely change and is usually set by the national government.
Fixed exchange
exposed on foreign exchange risk are
importers, exporters, investors and multinational firms.
Involve the exchange of bank deposits at some specified future date.
FORWARD TRANSACTIONS
buy-and-sell strategy in more than one market to make a riskless profit.
foreign exchange quotations in two different countries must be in line with each other.
Arbitrage/Triangular Arbitrage
the possibility of a drop in revenue or an increase in cost in an international transaction due to a change in foreign exchange rates.
Foreign exchange risk
A country’s balance of trade refers to the difference in how much a country is importing versus exporting.
Balance of payments
Involve immediate (two-day) exchange of bank deposits.
SPOT TRANSACTIONS
the exchange rate at which the currency for future delivery is quoted.
FORWARD RATES
arbitrage opportunities do not persist for a long time, thus, making spot exchange markets efficient.
true
foreign funds are supplied at an indexed price but with an option to convert to a future-based fixed price when a specified basis differential exists between the two prices
trigger pricing
Foreign Exchange Market also known as “Forex” is a global online network that buy and sell currency. It has no physical location, instead it is an over-the-counter market that operates 24 hours a day, seven days a week.
FOREIGN EXCHANGE MARKET
focuses on the decisions to hold domestic or foreign assets
modern approach
These are the two types of exchange rates:
flexible exchange
fixed exchange
occur in the over-the-counter market where they negotiate the exchange rate, the length of the forward contract, and the commission.
forward transactions
“Exchange rates between any two currencies will adjust to reflect changes in the price levels of the two countries.”
Theory of Purchasing Power Parity
emphasized the role of import and export demand
earlier approaches
a contract does not hedge any exposure, rather it creates the exposure.
speculative forward contract
cause interest rates to fall, decreasing its chance to acquire more foreign capital. The demand for the currency weakens, therefore, lowering the exchange rates.
Recession
person involved in arbitrage
arbitrageur
The Exchange rates of a currency fluctuate due to
imbalances between the supply and the demand levels which drive the market.
Some of the Economic factors that affect the movement in Exchange rate:
Inflation
interest rates
Balance of payments
Government intervention
Recession
Political, economic conditions and public debts
What are the Foreign Currency Exchange Rate Transactions?
SPOT TRANSACTIONS
FORWARD TRANSACTIONS
is simply the rate at which country’s currency can be traded for another country’s currency. It has two components, the domestic currency and the foreign currency.
Exchange rate
WHY ARE EXCHANGE RATE IMPORTANT?
Exchange rates are important because they affect the relative price of domestic and foreign goods.
The dollar price of French goods to an American is determined by the interaction of two factors: the price of the French goods in Euros and the euro/dollar exchange.
Exchange rates are among the most watched, and constantly evaluated economic measures.
