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International Finance > Exchange Rates > Flashcards

Exchange Rates Flashcards

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1
Q

Government Should be actively involved in the macroeconomy

A

Keynesian

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2
Q

Government should not get in the way of prices and market efficiency

A

New Classical

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3
Q

Prices are sticky

A

John maynard kaynes

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4
Q

exchange rates allow us to denominate the cost or price of a good or service in a common currency

A
  • How much does a Honda CRV cost? ¥3,000,000

* Or, ¥3,000,000 x $0.0098/¥1 = $29,400

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5
Q

Depreaciation

A

decrease in the value of a currency relative to another currency

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6
Q

appreaciation

A

increase in the value of a currency relative to another

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7
Q

will the sales of japense made hondas go up or down when the japense yen appreciates?

A

depends

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8
Q

amount of currency trading everyday

A

3 trillion

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9
Q

% of currency trading done in us dollars

A

90%

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10
Q

institutions buy or sell deposits of currency or assets for investment purposes

A

foreign exchange markets

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11
Q

participants in foreign exhange markets

A

commercial banks
non bank financial institutions
non financial bussinesses
central banks

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12
Q

trading dominated by

A

commercial and investment banks

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13
Q

currency trades by interbank deposits occur in domination of more than

A

1 million

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14
Q

Arbritage

A

buying low and selling high for a risk less profit

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15
Q

A depreciated currency is less valuable, and
therefore it can buy fewer foreign produced goods
that are denominated in foreign currency.

A
  • How much does a Honda cost? ¥3,000,000
  • ¥3,000,000 x $0.0098/¥1 = $29,400
  • ¥3,000,000 x $0.0100/¥1 = $30,000
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16
Q

A depreciated currency

A 
means that imports are 
more expensive and domestically produced goods 
and exports are less expensive. 
• lowers the price of exports 
relative to the price of imports.
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17
Q

why is there no signifigant arbritrage?

A

Computer and telecommunications
technology transmit information rapidly
and create integrated markets.

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18
Q 
1 USD = 100 JPY, 1 USD = 0.8 
EUR, 1 EUR = 150 JPY
•This situation is…
A.Bad for US citizens.
B.Bad for Japanese citizens.
C.Bad for European citizens.
D.A, B and C.
E.Great for anyone with math skills and a few 
dollars to play with.
A

E.Great for anyone with math skills and a few

dollars to play with.

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19
Q

1 EUR = 15000 IDR, 1 GBP =
20000 IDR, 1 GBP = 1.25 EUR
Triangular arbitrage…?
Triangular arbitrage…

A. Can happen if you go from EUR->GBP

->IDR

B. Can happen if you go from EUR->IDR

->GBP

C. Cannot happen here because the currency
values are aligned.

A

Cannot happen

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20
Q

spot rates

A

are exchange rates for currency
exchanges “on the spot”, meaning the
trade is executed in the present.

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21
Q

Forward rates are a ____
predictor of future spot rates.

A.Good
B.Poor
C.So-so

A

b poor

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22
Q

•Forward rates

A

•Forward dates are typically 30, 90, 180, or 360
days in the future.
•Rates are negotiated between the two parties
now, but the exchange occurs in the future

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23
Q

Foreign exchange swaps

A

a combination of a
spot sale with a forward repurchase.
•Swaps often result in lower fees or transactions
costs because they combine two transactions.

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24
Q

a contract giving the
option to buy or sell a set amount of
foreign currency on or before a set
date.

A

Options contracts

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25
Q

•What influences the demand for
deposits denominated in domestic or
foreign currency?

A

Rate of return.
•Risk
•Liquidity:ease of using the asset to buy goods
and services

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26
Q

Real rate of return

A

•Real rate of return: inflation-adjusted rate of
return,
•represents the amount of goods & services that can
be purchased with earnings from the asset.
•(If prices are fixed, then the inflation rate is 0% and
nominal rate of return = real rate of return.)

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27
Q

Which do you think is the most

important to investors?

A

A.Expected rate of return
B.Amount of risk
C.Liquidity

28
Q

Rates of return that investors expect to

earn are determined by

A

•interest rates that the assets will earn
•expectations about appreciation or
depreciation
•Inflation rate

29
Q

•Suppose the interest rate on a dollar deposit is 2%.
•Suppose the interest rate on a euro deposit is 4%.
•Does a euro deposit yield a higher expected rate
of return?

A

•The rate of return in terms of dollars from
investing in euro deposits is ($100.88-$100)/$100 =
0.88%.
•VS. a dollar deposit.
•The dollar rate of return is simply the interest rate.
•After 1 year the $100 is expected to yield $102:
($102-$100)/$100 = 2%

30
Q

•Suppose the interest rate on a dollar deposit is 2%.
•Suppose the interest rate on a euro deposit is 4%.•Suppose today the exchange rate is $1/€1, and the expected
rate one year in the future is $0.97/€1.

A

•$100 can be exchanged today for €100.
•These €100 will yield €104 after one year.
•These €104 are expected to be worth $0.97/€1 x
€104 = $100.88 in one year.

31
Q

The difference in the rate of return on

dollar deposits and euro deposits is

A

R$ -(R€+ (Ee$/€-E$/€)/E$/€)

32
Q

Model of Foreign Exchange

Markets

A

•This model is in equilibrium when deposits of
all currencies offer the same expected rate of
return: interest parity.

33
Q

•How do changes in the current exchange
rate affect the expected rate of return
of foreign currency deposits, ceteris
parabus?

A

•All else held equal, depreciation of the
domestic currency today lowers the expected
rate of return on foreign currency deposits.

34
Q

why does depreciation of domestic currency affe ct the expected rate of return on foreign currency deposits

A

When the domestic currency depreciates, the initial
cost of investing in foreign currency deposits
increases, thereby lowering the expected rate of
return of foreign currency deposits.

35
Q

Appreciation of the domestic currency today

A

raises the expected return of deposits on

foreign currency deposits.

36
Q

If Ee$/€= $1.05 per Euro, and today
E$/€= $1.00 per Euro, and the
interest rate in Europe is 5%, then….

A.The dollar is expected to depreciate about
5% vs the Euro.
B.The expected dollar return on a European
deposit is 10%.
C.Both A and B.
D.Neither A nor B.

A

C.Both A and B.

37
Q 
What happens to the graph 
when the US interest rate rises?
A.Red line shifts left.
B.Red line shifts right.
C.Green line shifts left.
D.Green line shifts right.
A

B.Red line shifts right.

38
Q

What happens to the graph when
the European interest rate rises?

A.Red line shifts left.
B.Red line shifts right.
C.Green line shifts left.
D.Green line shifts right.

A

B.Red line shifts right.

39
Q

What happens to the graph when
people think the Euro will
appreciate more than they did
before?

A.Red line shifts left.
B.Red line shifts right.
C.Green line shifts left.
D.Green line shifts right.

A

B.Red line shifts right.

40
Q

Covered Interest Parity

A

•It says that rates of return on dollar deposits and
“covered” foreign currency deposits are the same.
•How could you earn a risk-free return in the foreign
exchange markets if covered interest parity did not hold?
•Covered positions using the forward rate involve little risk.

41
Q

If E$/€= $1.00 per Euro, F$/€= $1.10
per Euro, R€= 5%, and R$= 10%, ….

A.Buy Euro at the spot rate, buy Euro bonds,
sell Euro at forward rate, borrow against
future cash at US rate.
B.Buy dollars at the spot rate, buy US bonds,
sell dollars at forward rate, borrow against
future cash at Europe’s rate.
C.Covered interest arbitrage not possible.

A

B.Red line shifts right.

42
Q

If E¥/$= ¥100 per dollar, F¥/$ = ¥90 per
dollar, R¥= 2%, and R$= 13.33%, ….
A.Buy yen at the spot rate, buy Japanese
bonds, sell yen at forward rate, borrow
against future cash at US rate.
B.Buy dollars at the spot rate, buy US bonds,
sell dollars at forward rate, borrow against
future cash at Japan’s rate.
C.Covered interest arbitrage not possible.

A

B.Red line shifts right.

43
Q

If E$/€= $1.3605 per Euro, F$/€=
$1.4190 per Euro, R€= 3.23%, and R$
= 3.69%, ….
A.Buy Euro at the spot rate, buy Euro bonds, sell Euro
at forward rate, borrow against future cash at US
rate.
B.Buy dollars at the spot rate, buy US bonds, sell
dollars at forward rate, borrow against future cash at
Europe’s rate.
C.Covered interest arbitrage not possible.

A

B.Red line shifts right.

44
Q

All else equal, an
increase in the US interest rate will:

A.Appreciate the dollar as investors demand
more dollar investments.
B.Depreciate the dollar because people know
the economy will contract as investment falls.

A

A.Appreciate the dollar as investors demand

more dollar investments.

45
Q

are prices volatile?

A

Changes in price

levels are less

volatile, suggesting

that price levels

change slowly.

46
Q

are exchange rates volatile?

A

Exchange rates are
influenced by
interest rates and

expectations, which
may change rapidly,
making exchange
rates volatile.

47
Q 
•Europe’s interest rates are still 10%.
•US interest rates have dropped to 5%.
•$2 = 1€at forward rates (1 year)
•If $2 = 1€today, which currency would 
you invest in?
A.Euros
B.Dollars
C.Indifferent
A

idk

48
Q

•The exchange rate is said to overshoot when
its immediate response to a change is greater
than its long run response.
•Overshooting is predicted to occur when
monetary policy has an immediate effect on
interest rates, but not on prices and inflation.

A

•Overshooting helps explain why exchange

rates are so volatile.

49
Q

ECONOMIC BENEFITS OF

SNOWSTORMS

A

INCREASED SPENDING ON SUPPLIES

SNOW REMOVAL SERVICES & JOBS

MULTIPLIER EFFECTS

50
Q

ECONOMIC COSTS OF

SNOWSTORMS

A

DISRUPTS PRODUCTION

GOVERNMENT EXPENSE

BROKEN WINDOW EFFECT

51
Q

strong currency

A 
A ‘strong’ 
currency 
is one that 
maintains 
its value 
over time 
well.
52
Q

WHY IS INTERNATIONAL FINANCE ITS OWN

COURSE?

A

A.BECAUSE COUNTRIES CAN INTERFERE WITH
INTERNATIONAL TRANSACTIONS WITH POLICIES.
B.BECAUSE COUNTRIES CAN SPECIALIZE IN WHAT
THEY ARE GOOD AT AND THEN TRADE, UNLIKE
WHAT HAPPENS WITHIN THE DOMESTIC
ECONOMY.
C.BECAUSE YOU NEED 21 CREDITS OF 300+ LEVEL
COURSES TO GRADUATE.
D.BECAUSE YOU NEED 2 COURSES OF 400+ LEVEL
FOR THE ECO MAJOR.
E.BOTH C AND D.

53
Q

WHICH OF THE FOLLOWING IS NOT AFFECTED BY
EXCHANGE RATES?

A.THE US PRICE OF A NEW FORD TRUCK.
B.THE FRENCH PRICE OF ITALIAN WINE, SINCE THEY 
SHARE THE SAME CURRENCY.
C.THE VALUE OF THE US SAVINGS BOND YOU 
BOUGHT LAST YEAR.
D.ALL OF THE ABOVE.
E.NONE OF THE ABOVE.
A

D.ALL OF THE ABOVE.

54
Q

IN A ZERO-SUM GAME, ONE PERSON’S GAIN IS
ANOTHER PERSON’S LOSS. IS INTERNATIONAL
ECONOMICS A ZERO-SUM GAME?

A.YES
B.NO

A

no

55
Q

•CURRENT ACCOUNT:

A

•CURRENT ACCOUNT: IMPORTS AND EXPORTS
1.MERCHANDISE (GOODS LIKE DVDS)
2.SERVICES (LEGAL SERVICES, SHIPPING SERVICES,
TOURIST MEALS,…)
3.INCOME RECEIPTS (INTEREST AND DIVIDEND
PAYMENTS, EARNINGS OF FIRMS AND WORKERS
OPERATING IN FOREIGN COUNTRIES)
4. GIFTS (TRANSFERS) ACROSS COUNTRIES THAT DO
NOT PURCHASE A GOOD OR SERVICE NOR SERVE AS
INCOME FOR GOODS AND SERVICES PRODUCED

56
Q

CAPITAL ACCOUNT:

A
  1. OFFICIAL (INTERNATIONAL) RESERVE ASSETS
  2. ALL OTHER ASSETS
  3. STATISTICAL DISCREPANCY
57
Q
  • YOU IMPORT A DVD OF JAPANESE ANIME BY USING YOUR DEBIT CARD.
  • THE JAPANESE PRODUCER OF ANIME DEPOSITS THE MONEY IN ITS BANK ACCOUNT IN SAN FRANCISCO. THE BANK CREDITS THE ACCOUNT BY THE AMOUNT OF THE DEPOSIT.
A

DVD purchase
(current account) –$30

Credit (“sale”) of deposit in account by bank (capital account)
+$30

58
Q

buying foreignn currency WHAT IS THE OTHER ENTRY ON THIS STOCK PURCHASE
•A. CAPITAL ACCOUNT (DEPOSIT IN BANK).
•B. CURRENT ACCOUNT (CHANGE IN COMPANY OWNERSHIP).
•C. NO SECOND ENTRY UNTIL THE STOCK IS SOLD BACK.

A

Capital account credit

59
Q

•YOU INVEST IN THE JAPANESE STOCK MARKET BY BUYING $500
IN SONY STOCK.
•SONY DEPOSITS THE MONEY IN ITS LOS ANGELES BANK
ACCOUNT. THE BANK CREDITS THE ACCOUNT BY THE AMOUNT
OF THE DEPOSIT.

A

Purchase of stock
(capital account)

–$500

Credit (“sale”) of deposit in account by bank(capital account)

+$500

60
Q

•U.S. BANKS FORGIVE A $100 M DEBT OWED BY THE GOVERNMENT OF
ARGENTINA THROUGH DEBT RESTRUCTURING.
•U.S. BANKS WHO HOLD THE DEBT THEREBY REDUCE THE DEBT BY
CREDITING ARGENTINA’S BANK ACCOUNTS.

A

Debt forgiveness: net unilateral transfer
(current account)
–$100 M

Credit (“sale”) of account by bank
(capital account)
+$100 M

61
Q

hOW DO THE BALANCE OF PAYMENTS

ACCOUNTS BALANCE?

A 
•DUE TO THE DOUBLE ENTRY OF EACH 
TRANSACTION, THE BALANCE OF PAYMENTS 
ACCOUNTS WILL BALANCE BY THE FOLLOWING 
EQUATION:
CURRENT ACCOUNT + CAPITAL ACCOUNT + 
STATISTICAL ADJUSTMENT= 0
62
Q

•CAN YOU TEMPORARILY HAVE A BALANCE OF
PAYMENTS DEFICIT, WHERE CA + KA < 0?

A. YES

B. NO

A

f

63
Q

I VISIT MOSCOW AND RENT A
MOTORCYCLE USING MY DEBIT
CARD. THIS TRANSACTION IS A…
•A. A CREDIT IN THE US CURRENT ACCOUNT (SERVICES) AND A DEBIT IN THE RUSSIAN CAPITAL ACCOUNT (OTHER ASSETS).
•B. A DEBIT IN THE US CURRENT ACCOUNT (SERVICES) AND A CREDIT IN THE RUSSIAN CAPITAL ACCOUNT (OTHER ASSETS).
•C. A CREDIT IN THE US CURRENT ACCOUNT (SERVICES) AND A DEBIT IN THE US CAPITAL ACCOUNT (OTHER ASSETS).
•D. A DEBIT IN THE US CURRENT ACCOUNT (SERVICES) AND A CREDIT IN THE US CAPITAL ACCOUNT (OTHER ASSETS).

A

Debit to us current account services

Credit In the us capital account other assset

64
Q

THERE IS NO EASY WAY FOR THE US TO
REDUCE ITS STATUS AS A DEBTOR NATION
WITHOUT DEFAULTING.

A. TRUE

B. FALSE

A

A. TRUE

65
Q

•ABOUT 70% OF FOREIGN ASSETS HELD BY THE U.S. ARE DENOMINATED IN FOREIGN CURRENCIES AND ALMOST ALL OF U.S. LIABILITIES (DEBT) ARE DENOMINATED IN DOLLARS.

A

FOREIGN HOLDERS OF U.S. SECURITIES

66
Q

INTERNATIONAL INVESTMENT POSITION OF THE

U.S. AT YEAR-END (IN BILLIONS OF DOLLARS)

A

f

67
Q

What is overshooting

A

The phenomenon where exchanged rates over react to changes in monetary policy to compensate for sticky prices

International Finance (1 decks)

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