Exchange Rate Flashcards
The definition of exchange rate
The price of one currency expressed in terms of other
Definition of forex market
Foreign exchange transactions are carried out in the foreign exchange market
Features of forex market
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
What is the difference between buying rate and selling rate called
The difference is called the spread and represents the dealers returns on the transaction
Two kind of float in a float system
Clean or free float
Dirty or managed float
What is the clean float
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
What is dirty float
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
Two kinds of intervention
Direct intervention
Indirect intervention
Pegged exchange rate
What is direct intervention
Reserve bank becomes a buyer and seller for foreign currencies
When $A depreciate too much what will the RBA do
When $A appreciate too much what will the RBA do
RBA will buy $A on the force market
RBA will sell $A and buy foreign currency
What is indirect intervention
Reserve bank may wish to change the interest rat e differentials between Aust and overseas
What a high interest rate result in
High interest rate in Australia will encourage capital inflow, discourage capital outflow
What is fixed(pegged) exchange rate
Exchange rate against hard currency ($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
What is the demand for $A
A derived demand from buyer of $A who hold other currency
Why have the demand for $A
Buy(imports) Aust good and services
invest in Australia
Travel to Australia
Repay loans profits to Australia
Speculate on future value of $A
what is the supply of $A
Holders of $A offering then for exchange for other currencies
Why there is the demand for $A
Australian bring overseas goods and services
Australian investing overseas
Australian traveling overseas
Australian repaying loans profits to overseas
Two kinds of exchange rate movements
Appreciation
Depreciation
The definition of appreciation
How to achieve that
An increase in the ER of one currency in terms of another
Increase the demand of $A or decrease the supply for $A
The definition of depreciation
How to achieve that
A decrease in the exchange rate of one currency in terms of another
Decrease demand for $A or increase supply for $A
The advantages of floating currency
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
Disadvantage of floating currency
Violative-large or sudden changes
Future transactions uncertain
Depreciation may cause inflation
Speculators may target a country and cause appreciation or depreciation
What is CAD
What will happen in CAD
How to inverse such situation
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
revalue
To increase the value of a currency in an otherwise fixed system
Devalue
To decrease the value of a currency in an otherwise fixed system
Floating
Adjective describing a rate that changes or various
Proponents
People who argue in favor of sth
Depreciate
To fall in value in a market system
Appreciate
To rise in value in a market system
Hedge
To attempt to protect oneself against future price changes
Currency fluctuations
Continuous changes in a price or value
Future contracts
Agreement to buy sth at a fixed price several month ahead
