Exchange rates

Question 1

IMF

Answer 1

internation organization established to promote

• international monetary cooperation
• exchange stability
• orderly exchange arrangements

Question 2

first, second and third source of supply & demand on currency markets

Answer 2

1: import / export of G&S
2: FDI

Third: Financial investors

Question 3

foreign exchange rate

Answer 3

price of one currency in term of another

Question 4

Purchasing power parity PPP

Answer 4

conversion that determines the equivalent amount of G&S different currencies can purchase

Question 5

PPP hypothesis

Answer 5

in the long run, baskets of goods would cost the same in all currencies “law of one price”

Question 6

what determine exchange rate

Answer 6

relative prices direness & PPP
interest rate 
money supply
productivity 
balance of payments 
exchange rate policy
investor psychology

Question 7

balance of payment

Answer 7

a country’s international transaction statement

Question 8

Current account balance

Answer 8

balance of trade + net factor income form abroad + unilateral transfer form abroad

Question 9

Exchange rate policies

Answer 9

Floating (flexible) D&S determine exchange rate

Clean (free): pure market solution to determine exchange rates

Dirty (managed) float: government intervention determine exchange rates

targe exchange rate (crawling bands): upper or lower bounds within which an exchange rate is allowed to fluctuate

Question 10

bandwagon effect

Answer 10

effect of investors moving in the same direction at the same time

Question 11

Capital flight

Answer 11

phenomenon in which a large number of individuals & companies exchange domestic corrections for a foreign currency

Question 12

Evolution of the international monetary system - gold standard

Answer 12

system in which the value of most major currencies was maintained by fixing their prices in terms of gold

Question 13

Evolution of the international monetary system - common denominator

Answer 13

currency or commodity to which the values of all currencies are pegged

Question 14

Evolution of the international monetary system - Bretton woods system:

Answer 14

system in which all currencies were pegged at a fixed rate to the USD

Question 15

Evolution of the international monetary system - post Bretton woods system

Answer 15

system of flexible exchange rate regimen with no official common denomination

Question 16

Evolution of the international monetary system - quota

Answer 16

weight a meter country carries within the IMF, which determines

• the amount of its financial contribution
• ist capacity to borrow from the IMF
• its voting power

Question 17

Managing exchange rate risk

Answer 17

• stetegiacallxy structuring business that revenues are in the same currencies as expenses
• invoicing in your own currency
• strategic hedging –> if part of the production occurs locally, then some of the costs are in local surety
• risk diversification by trading in multiple currencies
• using financial market instrument to manage risk exposure
• sport market transaction plus investing or borrowing in foreign currency
• smap market transaction (foreign exchange transaction between 2 firms in which one currency is converted into another in time 1, with an agreement & another time in the future they will revert it back to the original currency=

-forward market transaction
(forward discount: when forward rate of one currency relative to another currency is higher than the sport rate)
(forward premium: when forward rate of one currency relative to another currency is lower than the spot rate)

Question 18

Currency exchange markets

offer rate:

Answer 18

offer rate: price at which a bank is willing to sell a currency

Question 19

Currency exchange markets

bid rate

Answer 19

price at which a bank is willing to buy a currency

Question 20

Currency exchange markets

spread

Answer 20

durance between the offer price and the bid price