Currency Exchange Rates

Question 1

What are currency exchange rates?

Answer 1

The price of one unit of currency relative to another currency.

Question 2

What is the nominal exchange rate of 1.44 USD/EUR interpretted as?

Answer 2

$1.44 per euro.

Question 3

Of the nominal exchange rate of 1.44 USD/EUR, which currency is the Price Currency?

Answer 3

USD is the price currency.

Question 4

Of the nominal exchange rate of 1.44 USD/EUR, which currency is the Base Currency?

Answer 4

EUR

Question 5

A decrease in a direct exchange rate represents an appreciation in?

Answer 5

The domestic currency relative to the foreign currency.

Question 6

What is the spot exchange rate?

Answer 6

The rate for immediate delivery.

Question 7

What is a forward exchange rate?

Answer 7

A rate for exchange of currencies at some future date.

Question 8

What does a real exchange rate measure?

Answer 8

Changes in relative purchasing power over time.

Question 9

What is the calculation for the real exchange rate(domestic/foreign)?

Answer 9

= spot exchange rate(domestic/foreign)

Question 10

12.1 MXN/USD is a direct quote for which currency?

Answer 10

MXN, it is a direct quote for a Mexican peso-based investor

Question 11

How do you switch an indirect currency quote to a direct currency quote?

Answer 11

By taking the reciprocal of the indirect rate yields a direct quote.

Question 12

12.1 MXN/USD is an indirect quote for which currency?

Answer 12

An indirect quote for a USD-based investor.

Question 13

How do you calculate the percentage appreciation of a currency exhange rate?

Answer 13

1. The price goes down
2. As the percentage change in the base currency.
3. Ex: Exchange rate from 1.44 to 1.42 represents an appreciation of the USD relative to the EUR of 1.41%: (1 / 1.42) / (1 / 1.44) − 1 = −0.0141.

Question 14

How do you calculate the percentage depreciation of a currency exhange rate?

Answer 14

1. The price goes up)
2. As the percentage change in the base currency.
3. Ex: A decrease in the USD/EUR exchange rate from 1.44 to 1.42 represents a depreciation of the EUR relative to the USD of 1.39% (1.42 / 1.44 − 1 = −0.0139).

Question 15

What is a cros currency rate?

Answer 15

The currency exchange rate between two currencies, both of which are not the official currencies of the country in which the exchange rate quote is given in.

Question 16

Caluculate the folling cross rate:

MXN/USD quote is 12.1

USD/EUR quote is 1.42

Answer 16

We can calculate the cross rate of MXN/EUR as 12.1 × 1.42 = 17.18.

Question 17

What are foreign currency points?

Answer 17

1. Units of the last digit of the quotation.
2. Ex: A forward quote of +25.3 when the USD/EUR spot exchange rate is 1.4158 means that the forward exchange rate is 1.4158 + 0.00253 = 1.41833 USD/EUR.

Question 18

How is a forward premium or discount calculated?

Answer 18

As the percentage difference between the spot exchange rate and the forward exchange rate expressed as price/base values.

Question 19

What does a positive value indicate when calculating a forward premium or discount?

Answer 19

A positive value means the base currency is trading at a forward premium equal to the percentage difference.

Question 20

What does a negative value indicate when calculating a forward premium or discount?

Answer 20

A negative value means the base currency is trading at a forward discount.

Question 21

What are the two exchange rate regimes for countries that do not have their own currency:

Answer 21

1. Formal dollarization
3. Monetary union

Question 22

What is Formal Dollarization?

Answer 22

1. When a country uses the currency of another country.
2. For countries that do not have their own currency.

Question 23

What is a Monetary Union?

Answer 23

1. For countries that do not have their own currency.
2. When several countries use a common currency.

Question 24

What are the seven exchange rate regimes for countries that have their own currency:

Answer 24

1. A currency board arrangement
2. Conventional fixed peg arrangement
3. Pegged exchange rates
4. Crawling peg
5. Management of exchange rates within crawling bands,
6. Floating exchange rates
7. Independently floating

Question 25

What is a currency board arrangement?

Answer 25

An explicit commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate.

Question 26

What is a conventional fixed peg arrangement?

Answer 26

When a country pegs its currency within margins of ±1% versus another currency.

Question 27

What is a a system of pegged exchange rates within horizontal bands or a target zone?

Answer 27

When the permitted fluctuations in currency value relative to another currency or basket of currencies are wider (e.g., ±2%).

Question 28

What is a crawling peg?

Answer 28

When the exchange rate is adjusted periodically, typically to adjust for higher inflation versus the currency used in the peg.

Question 29

What is management of exchange rates within crawling bands?

Answer 29

When the width of the bands that identify permissible exchange rates is increased over time.

Question 30

What is a system of managed floating exchange rates?

Answer 30

When the monetary authority attempts to influence the exchange rate in response to specific indicators such as the balance of payments, inflation rates, or employment without any specific target exchange rate.

Question 31

When is a currency independently floating?

Answer 31

When the exchange rate is market-determined.