chapter 9

Question 1

determinants of Exchange Rates

Answer 1

Supply and Demand
Interest Rates
Economic indicators
Political Stability: Political events and stability affect investor confidence.

Question 2

how exchange rate affects business decision

Answer 2

1. Exchange rate fluctuations can affect import/export costs, impacting cost and revenue which will impact profitability.
2. Affects decisions on where to invest or locate production.
3. Companies must consider potential rate changes in their long-term plans.

Question 3

what are forex risks?

Answer 3

Transaction Risk
Translation Risk
Economic Risk

Question 4

what is transaction risk?

Answer 4

Arises from the effect of exchange rate changes on international trade transactions.

Question 5

what is translation risk?

Answer 5

when a company operates in multiple countries and needs to consolidate its financial statements. The challenge comes from dealing with different currencies and their changing exchange rates.

Question 6

what is an economic risk?

Answer 6

It involves changes in market conditions due to exchange rate movements, affecting customer behavior and market demand.

Question 7

define arbitrage

Answer 7

purchase of foreign currency on one market for immediate resale on another market (in a different country) to profit from a price discrepancy.

Question 8

what does the International Monetary Fund do

Answer 8

It provides financial assistance, advice, and training to its member countries to help them achieve these goals:
1. promote global monetary cooperation
2. secure financial stability
3. Facilitate international trade
4. promote high employment
5. sustainable economic growth
6. reduce poverty around the world.

Question 9

what is the Quota system

Answer 9

when each member in the IMF contributes funds based on their economic size.

Question 10

Currency classification by the IMF

Answer 10

Hard Peg
Soft Peg
Floating

Question 11

what is a hard peg?

Answer 11

This means the country’s currency has a fixed exchange rate with one or more currencies. It doesn’t change or fluctuate very much. The country’s central bank actively ensures this fixed rate is maintained.

Question 12

what is soft peg

Answer 12

when the currency is also pegged to another currency but with more flexibility. The exchange rate can fluctuate within a certain range. The central bank might adjust the value occasionally within this range based on various economic factors.

Question 13

what is floating

Answer 13

when a country’s currency value changes freely based on market forces like supply and demand. A floating rate can go up and down with economic conditions. The currency’s value is determined by factors such as interest rates, economic performance, and investor perception.

Question 14

what is the central bank’s role?

Answer 14

Manage reserve assets
intervene in markets
vary in intervention attitudes.

Question 15

define black market

Answer 15

closely approximates a price based on supply and demand for a currency instead of a government-controlled price

Question 16

what is fundamental forecasting?

Answer 16

uses trends in economic variables to predict future rates

Question 17

what is Technical forecasting

Answer 17

uses past trends in exchange rates to spot future trends. Timing, direction, and magnitude of exchange rate movements are important to consider

Question 18

what is Purchasing power parity (PPP)

Answer 18

define relationship between currencies based on inflation

Question 19

what is big mac index

Answer 19

an informal way of measuring the purchasing power parity (PPP) between two currencies. It compares the price of a Big Mac burger in McDonald’s restaurants in different countries to the price in the United States. This comparison provides an understanding of whether a currency is undervalued or overvalued relative to the U.S. dollar. The idea is that the Big Mac is a product that is available in many countries and of relatively uniform quality, making it a good item for such comparisons.

Question 20

what is supply and demand influenced by

Answer 20

international trade and capital flows.

Question 21

examples of economic indicators

Answer 21

GDP growth
inflation
employment rates.

Question 22

advantage of having high interest rates

Answer 22

Higher rates attract foreign investment, increasing demand for the currency.