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Money, Banking and Financial Markets > Foreign Exchange Market > Flashcards

Foreign Exchange Market Flashcards

1
Q

what is Nominal exchange rate (e)?

A
  • price of one unit of a currency in terms of another currency
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2
Q

Trading Markets of currencies: (currency exchange)

A
  1. The Interbank Market (large commercial banks)
  2. The Retail Market (commercial bank act as a broker)
  3. small-scale currency markets (airports, etc)
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3
Q

what Appreciation mean in the finance world?

A
  • rise in a currency’s price in terms of foreign currency
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4
Q

what is Depreciation ? (currency exchange rate)

A
  • fall in a currency’s price in terms of foreign currency
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5
Q

when dollar appreciate, what happens? (economy)

A

When the dollar Appreciates:

  • Import become less expensive
  • Benefits U.S consumers
  • Hurts U.S firms that compete with imports

U.S goods became more expensive to foreigners

  • Hurts U.S firms that export

Foreign assets became less valuable in dollars

  • Hurts U.S owners of foreign assets
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6
Q

Currency Futures and Hedging

A
  • Currency futures work in a way similar to futures contracts for stocks and bonds
  • Currency futures are traded on the Reuters and EBS networks
  • Same function of risk reduction or “betting”
  • Hedgers can’t eliminate exchange rate risk entirely.The use of currency futures is limited because contracts rarely have delivery dates more than 6 months in the future.
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7
Q

Real exchange rate (€)

A
  • measure of the relative prices of domestic and foreign goods ( € =􏰀 eP/P* )
  • This requires that we measure these prices in the same currency.
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8
Q

Trade-weighted real exchange rate :

A
  • weighted average of a country’s real exchange rates, with weights proportional to levels of trade
  • A way of evaluating the strength of a country’s currency by weighting its value according to the relative amount of trade carried out with each of its trading partners.
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9
Q

Purchasing power parity (PPP)

A
  • theory of exchange rates based on the idea that a currency purchases the same quantities of goods and services in different countries; implies that real exchange rates are constant over time
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10
Q

The Law of One Price

A
  • theory that an identical good or service has the same price in all locations.
  • The theory count trade only across national borders.
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11
Q

definition of arbitrage ?( Law of one price)

A
  • The difference in price between different location creates opportunities for people to make money by buying and selling.
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12
Q

Nominal Exchange Rate formula:

A

e = P*/P

P = national price (what you want)

P*= Foreign price (compering to )

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13
Q

foreign inflation rate formula :

A

percentage change in e􏰀 = pi* - 􏰅pi

  • “pi” stands for the inflation rate
  • “pi*“ stand for the percentage change in the inflation rate
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14
Q

supply of dollars formula: (trade)

A

supply of dollars 􏰀 = imports + 􏰁 capital outflows

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15
Q

Definition Net exports (NX):

A
  • exports minus imports
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16
Q

Definition of Net capital outflows (NCO):

A
  • capital outflows minus capital inflows
17
Q

Net exports (NX) and Net capital outflows (NCO):

A

NX 􏰀= NCO

  • NX is positive if exports exceed imports, creating a trade surplus, and negative if imports exceed exports, creating a trade deficit.
  • net capital outflows can be either positive or negative
  • net exports and net capital outflows must be equal to balance the supply and demand for dollars. (to avoid distorsions)
18
Q

graph that shows the relationships:

  1. net exports,
  2. net capital outflows
  3. the real exchange rate
A
19
Q

Why Do Real Exchange Rates Fluctuate?

A
  • Shifts in net capital outflows because of . . .
  • Changes in real interest rates (causes include changes in monetary policy or in budget deficits)
  • Changes in confidence
  • Changes in expected future exchange rates
  • Shifts in net exports because of . . .
  • Foreign recessions
  • Changes in commodity prices
20
Q

Shifts in Net Capital Outflows (graph)

A
21
Q

How the Changes in Interest Rates affect the exchange rate ?

A
  • factors that influence the real interest rate also affect the real exchange rate
  • Examples : government budget deficits, tightening of monetary policy, etc.
22
Q

Shifts in Net Exports:

A
23
Q

what is Order flow ? (dealer markets)

A
  • in a dealer market, the difference between total buy orders and sell orders over some period
24
Q

Meaning of “Technical analysis”? (Forecast Methods)

A
  • Set of methods for forecasting prices in financial markets based on the past behavior of prices
  • more popular in currency markets
  • Comparing Averages
  • Support and Resistance Levels (mantain between a range above and below its current level)

Money, Banking and Financial Markets (14 decks)

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