Currencies Flashcards
What is the spot exchange rate?
It’s the price a buyer will pay right now for a foreign currency
What is the forward exchange rate?
It’s the price that one currency will be converted into another currency at sometimes date in the future
Is the price at which currencies will be exchanged at some time in the future
What factors affect foreign exchange rates?
- Differences in interest rates
- Differences in inflation
- Political stability and economic performance
- Trade policies
- Public debt
What is the difference between a strong and a weak currency?
Strong currency is a currency whose value is increasing relative to other currencies. Weak currency is a currency whose value is decreasing relative to other currencies
What are some ways the market exchange rate between two country’s currencies is determined?
- Difference in interest rates
If the interest rate goes up in country B relative to country A, then country A currency weakens and country B currency strengthens. Because the demand for country B increases, as investors get higher rates of return, and increased demand strengthens currency - Difference in inflation
If country B is expected to experience high inflation, the currency of country B will become less valuable.
If the U.S. dollar weakens, should U.S. interest rates generally rise, fall, or stay the same?
Interest rates increase if U.S. dollar weakens
- when the U.S. dollar weakens, the price of imported goods increase, causing higher inflation. So this puts pressure in the FED to raise interest rates.
If inflation rates in the United States fall relative to Great Britain’s, what happens to the exchange rate?
Then there will be more pounds than dollars in circulation, so the dollar becomes worth more in pounds. So U.S. dollar strengths compared to pound
This means that each dollar will cost more in pounds than it did before inflation
