Exchange Rates Flashcards
What should the difference in a countrys spot and forward rate reflect?
The difference in the country’s risk free rates.
What is the formula for forward rate of a country (price to base - including days).
Fp/b = Sp/b * (1 + (ip * days/360)) / (1 + (ib * days/360))
What is the relationship between real and nominal interest rate?
Real (domestic/foreign) = Nominal (domestic/foreign) x
(Price Level (foreign) / Price Level (domestic)
What is the formula for forward points and forward points expressed as percentage?
Points = (Forward rate - Spot Rate) x 10,000 Percentage = ((Forward Rate - Spot Rate) / Spot Rate) x 100
When a currency is trading at a forward discount, describe the a) forward vs. spot rate b) forward points c) price interest rate vs. base interest rate?
a) Forward > spot (p/b)
b) Forward points are positive
c) i(p) > i(b)
What are the two most flexible and least flexible currency regimes?
Flexible = Independent and managed float Inflexible = Dollarization and Monetary Union
What are the ‘middle pack’ currency regimes (from least credible to most credible / most flexible to least flexible).
Crawling Band, Crawling Peg, Target Zone, Fixed Parity, Currency Board
Describe the market participants in foreign exchange markets?
Sell Side: Currency Trading Banks (market makers, product makers & sellers)
Buy Side: Corporate and Retail accounts, mutual funds, hedge funds, sovereign wealth funds, central banks
Describe a direct and indirect quote for currency exchange rates?
Direct = domestic / foreign Indirect = foreign / domestic
What is the appreciation of the JPY if the USD moves from 120 to 114 JPY.
USD depreciates 5%.
JPY appreciates 5.3% (1/114 - 1/120 / 1/120).
What is the formula to monitor the relative changes in two different currencies?
1 + %change one currency = 1 / ( 1 + %change another currency)
What happens to currency inflation when there is domestic inflation? How does a country mitigate this?
When domestic inflation is higher than currency inflation, there is upward pressure on currency inflation. The central bank must “sell” domestic currency, increasing the money supply and decreasing interest rates.
