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Econ > Currency Exchange Rates > Flashcards

Currency Exchange Rates Flashcards

1
Q

1 Euro = 1.30 USD

which is the base and price

A

euro is price
usd is base

price = base

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2
Q

USD/EUR = 1.3 means what

A

price/base = “P/B”

1 Euro = 1.3 USD

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3
Q

USD/EUR = 1.3 then USD/EUR = 1.4 means what

A
  • 1 euro now gets 1.4 USD

- the euro appreciated relative to USD

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4
Q

Nominal exchange rate is

A

AKA the spot rate “S”

- the quoted currency exchange rate at any point in time

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5
Q

The spot rate, aka

A

aka the nominal exchange rate

“S”

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6
Q

The real exchange rate …

A
  • adjusts the spot rate (nominal rt) for inflation in each country compared to a base period
  • shows the relative purchasing power of currencies

characteristics

  • directly related to nominal exchange rate
  • directly related to price level in base currency
  • inversely related to price level of price currency
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7
Q

Real exchange rate formula

and characteristics

A

Rp/b = Sp/b * (Pb / Pp)

characteristics

  • directly related to nominal exchange rate
  • directly related to price level in base currency
  • inversely related to price level of price currency
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8
Q

Spot transaction

A
  • currencies exchanged for immediate delivery

- most trades are settled “T+2” after the traded is agreed

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9
Q

Consider AUD/HKD. If the spot rate increases by 5%, HKD increases by 5%, and AUD increases by 2%, what is the change in purchasing power?

A

Rp/b (aka purchasing power) = Sp/b * (Pb / Pp)
so, Raud/hkd = Saud/hkd * (hdk / aud)

R = 1+5% * (1+5% / 1+2%)

= 1.05 * (1.05/1.02)
= 8.08%

CFA shortcut:
5% + 5% - 2% = 8%

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10
Q

In the FX market, which instrument has the highest usage?

A
  • swaps have the highest volume

- followed by the spot market

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11
Q

Direct quote

A
  • domestic currency is the Price currency and the foreign currency is the Base currency
  • a lower FX rt implies the value of the domestic currency is higher
    ie a smaller amount of domestic currency is needed to exchange for 1 unit of foreign currency
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12
Q

Indirect quote

A
  • domestic currency as the base currency and the foreign currency as the price currency
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13
Q

Direct and indirect quotes are

A
  • are the reciprocal of each other

USD/EUR = 1.4 as a direct quote

EUR/USD = .7142 as an indirect quote (1/1.4 = .7142)

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14
Q

If the USD/EUR goes up from 1.4 to 1.5, which currency appreciated, how much did it appreciate by, and how much did the other depreciate by?

A
  • the EUR is the base currency so 1 EUR = 1.4 USD then 1.5 USD. So, the EUR appreciated
  • 1.5 - 1.4 / 1.4 x 100 = 7.142% appreciation

**USD did not depreciate by 7.142%!!
- must first convert USD/EUR to an indirect quote
= 1 / 1.4 = EUR/USD= .7143
and 1 / 1.5 = EUR/USD = .6667

so USD depreciated:
- .6667 - .7143 / .7143 x 100 = -6.67%

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15
Q

A shortcut to find currency depreciation =

A

= the inverse of the appreciation currency

= (( 1 / 1 + appreciation %) - 1 ) * 100

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16
Q

If the BID/ASK from a dealer was 12.4020 - 12.4060 MXN/USD what is the bid/offer in terms of USD/MXN?

A

MXN/USD: Bid Ask
12.4020 - 12.4060

USD/MXN: 1/12.4060 - 1/12.4020

USD/MXN = 0.08061 - 0.08063 bid/ask

17
Q

If the USD/EUR spot is 1.2875 and the 12-month forward is -26.5 points, what is the 12-month forward rate?

A

Forward rt = 1.2875 + ( -26.5 / 10,000)
= 1.28485

    • divide by 10,000 if exchange rate uses four decimal places
    • divide by 100 if the exchange rate uses two decimal places
18
Q

The forward rate equation based on the spot rate and int rates in the two different countries =

A

Fp/b = Sp/b * (( 1 + ip) / ( 1 + ib))

Fp/b = Sp/b * (( 1 + ( ip * x / 360)) / ( 1 + ( ib * x / 360))

ip is the risk-free rate of the price currency
ib is the risk-free rate of the base currency

19
Q

The currency with the higher interest rate will always trade at …

A
  • will always trade at a discount in the forward market
20
Q

Finding fx cross rates:

A
  • given two exchange rates and three currencies, it is possible to determine the third exchange rate
  • set the unknow currency = to the rate 1 * rate 2 and use alg to solve.
  • might need to use the inverse of one rate in order to eliminate like terms
21
Q

If a country has a trade deficit, it imports more G/S than it exports. This deficit must be financed by …

A
  • by borrowing from foreigners or by selling assets to foreigners.
  • a trade deficit must be exactly matched by an offsetting capital account surplus
  • a trade deficit means a country’s investment spending is more than its domestic savings

X-M = S-I + T-G

22
Q

If demand of a currency increases, then ….

A
  • the fx rate increases

- capital flows are the primary determinant of exchange rt movements in the short-to-intermediate term

23
Q

Marshall-Lerner condition:

A
  • the combinations of exports and demand elasticities that cause depreciation of the domestic currency will move the trade balance toward surplus
  • and domestic currency appreciation will move trade balance toward deficit
  • the impact of currency appreciation or depreciation on trade balance depends on the elasticities of demand for imports and exports
24
Q

Marshall-Lerner condition formula and meaning

A

= (wX * eX) + (wM * (eM - 1))

  • if > 0, then a depreciation in the domestic currency will more the trade balance towards surplus
25
Q

A Marshall-Lerner of 0.04 means that …

A
  • a 1% decrease in the value of the domestic currency will improve the trade balance by 0.04%
  • so a 10% decrease leads to a .4% improvement
26
Q

The Absorption Approach and formula

A
  • focuses on the impact of exchange rate changes on capital flows
  • as a trade deficit must be offset by a surplus in the capital account (KA)

(X - M) = (S - I) + (T - G)

(X - M) = (S - I) - (G - T)

(X - M) = (S + T) - (I + G)

Balance of trade = national income - total expenditure

*total expenditure represents the absorption of G/S in an economy

27
Q

For a currency exchange rate change to improve trade balance, national income must increase relative to expenditure.
ie domestic savings (S) must increase relative to domestic investment (I)

A

na

Econ (7 decks)

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