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commerce > Exchange Rate > Flashcards

Exchange Rate Flashcards

1
Q

The definition of exchange rate

A

The price of one currency expressed in terms of other

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2
Q

Definition of forex market

A

Foreign exchange transactions are carried out in the foreign exchange market

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3
Q

Features of forex market

A

Any situation in which the currency of one country is converted into the currency of another

An international market (with no location)

Many buyers and sellers

Customers are quoted a buying rate and a selling rate for the currency they interested in
The buying rate is higher than selling rate

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4
Q

What is the difference between buying rate and selling rate called

A

The difference is called the spread and represents the dealers returns on the transaction

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5
Q

Two kind of float in a float system

A

Clean or free float

Dirty or managed float

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6
Q

What is the clean float

A

Determined by the demand and supply for a currency in forex market. These foraces change continuously so the rate changes continuously

all buyers must find a seller

Money supply are not affected by currency transaction

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7
Q

What is dirty float

A

Occurs when a country ‘s central bank interferes in the foreign exchange market or floating exchange rate

Intervenes to prevent excessive appreciation or depreciation

To smooth out short term fluctuations in the exchange rate

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8
Q

Two kinds of intervention

A

Direct intervention
Indirect intervention
Pegged exchange rate

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9
Q

What is direct intervention

A

Reserve bank becomes a buyer and seller for foreign currencies

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10
Q

When $A depreciate too much what will the RBA do

When $A appreciate too much what will the RBA do

A

RBA will buy $A on the force market

RBA will sell $A and buy foreign currency

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11
Q

What is indirect intervention

A

Reserve bank may wish to change the interest rat e differentials between Aust and overseas

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12
Q

What a high interest rate result in

A

High interest rate in Australia will encourage capital inflow, discourage capital outflow

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13
Q

What is fixed(pegged) exchange rate

A

Exchange rate against hard currency ($Us) by central bank or currency board

The rate does not change with supply and demand

To fix the rate the central bank must buy or sell the country’s currency daily. This requires foreign reserves

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14
Q

What is the demand for $A

A

A derived demand from buyer of $A who hold other currency

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15
Q

Why have the demand for $A

A

Buy(imports) Aust good and services

invest in Australia

Travel to Australia

Repay loans profits to Australia

Speculate on future value of $A

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16
Q

what is the supply of $A

A

Holders of $A offering then for exchange for other currencies

17
Q

Why there is the demand for $A

A

Australian bring overseas goods and services

Australian investing overseas
Australian traveling overseas
Australian repaying loans profits to overseas

18
Q

Two kinds of exchange rate movements

A

Appreciation

Depreciation

19
Q

The definition of appreciation

How to achieve that

A

An increase in the ER of one currency in terms of another

Increase the demand of $A or decrease the supply for $A

20
Q

The definition of depreciation

How to achieve that

A

A decrease in the exchange rate of one currency in terms of another

Decrease demand for $A or increase supply for $A

21
Q

The advantages of floating currency

A

Foreign currency transaction do not affect money supply gives the RBA influence over the domestic economy

A floating currency more accurately reflects a currency ‘a competitiveness

Encourage free trade because goods and services don’t have price distorted

A floating currency may assist a country to correct an adverse CAD

22
Q

Disadvantage of floating currency

A

Violative-large or sudden changes
Future transactions uncertain
Depreciation may cause inflation
Speculators may target a country and cause appreciation or depreciation

23
Q

What is CAD

What will happen in CAD

How to inverse such situation

A

Export price decrease, quantity increase
Import price increase,quantity decrease

If export and import are price elastic, when export earning increase and import spending decrease, CAD is reduces automatically

24
Q

revalue

A

To increase the value of a currency in an otherwise fixed system

25
Q

Devalue

A

To decrease the value of a currency in an otherwise fixed system

26
Q

Floating

A

Adjective describing a rate that changes or various

27
Q

Proponents

A

People who argue in favor of sth

28
Q

Depreciate

A

To fall in value in a market system

29
Q

Appreciate

A

To rise in value in a market system

30
Q

Hedge

A

To attempt to protect oneself against future price changes

31
Q

Currency fluctuations

A

Continuous changes in a price or value

32
Q

Future contracts

A

Agreement to buy sth at a fixed price several month ahead

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