foreign exchange

Question 1

FX market

Answer 1

quote driven
OTC
no central counterparty
two-way prices
spot market (largest)
forward market (speculative)

Question 2

adjustment +ve

Answer 2

discount

Question 3

adjustment -ve

Answer 3

premium

Question 4

IRP

Answer 4

exchange rates be/een 2 currencies for a given date in the future will account of the difference be/een interest rates

Question 5

covered IRP

Answer 5

FORWARd EXCHANGE rates incorporate difference in interest rates be/een 2 countries

Question 6

uncovered IRP

Answer 6

difference in interest rates be/een 2 countries equals the expected change #in exchange rates

Question 7

F/S

Answer 7

(1+rvar)/(1+rbase)

Question 8

PPP

Answer 8

exchange rates be/een 2 countries currencies will adjust automatically to take into account inflation rates

F/S = (1+ivar)/(1+ibase)

Question 9

international fischer effect

Answer 9

in a global market with free capital flows the real interest rate will be equal in all countries

F/S =(1+ivar)/(1+ibase)=(1+Rvar)/(1+Rbase)

Question 10

EXCHANGE rate regimes

Answer 10

fixed: to foreign currency
floating: no intervention, price of domestic currency allowed to reach its own value through demand and supply
managed or ‘dirty-floating’: intervention to coax exchange rate in a direction

Question 11

arguments for exchange rates

Answer 11

reduced foreign exchange risk
increased gvmnt discipline in economic mngmnt
speculation is discouraged

Question 12

arguments against exchange rates

Answer 12

no automatic balance of payment adjustment (deficits adjusted only through decrease in aggregate demand)
system requires large holdings of foreign currency reserves
loss of freedom of economic policy

Question 13

OCA

Answer 13

entire region share singe currency
similar to fixed exchange rate
must have political union to work well