Foreign Exchange Markets

Question 1

Problems companies face when buying or selling goods overseas

Answer 1

may be forced to deal in foreign currency, may be barriers (tariffs, quotas) difference in legal traditions

Question 2

Two types of international markets

Answer 2

International money & capital markets, which provide the market for credit,
the foreign exchange market which deal in the means of payment

Question 3

EUR/USD = 1.088
What is the base currency?
What is the terms currency?

Answer 3

EUR = Base Currency
USD = terms currency
1 EUR is worth 1.088 USD

Question 4

If the base currency is a foreign currency and the terms currency is the domestic currency the quoted is called a…

Answer 4

Direct Quote

Question 5

If the base currency is the domestic currency and the terms currency is the foreign currency the quoted is called an

Answer 5

Indirect quote

Question 6

The bid price means that a dealer will..

Answer 6

buy base currency

Question 7

The ask price =

Answer 7

price dealer will sell base currency

Question 8

When a country’s currency appreciates (rises in value relative to other currencies)

Answer 8

the country’s goods abroad become more expensive and foreign goods in that country become cheaper (holding domestic prices constant in the two countries).

Question 9

A depreciating NZ dollar helps…

Answer 9

NZ producers sell more goods, but hurts NZ consumers are foreign goods are more expensive

Question 10

Cross Currency triangulation
EUR/USD = 1.09
NZD/USD = 0.6
therefore NZD/EUR =…

Answer 10

0.6/1.09

Question 11

What determines the equilibrium rate

Answer 11

demand and supply of currencies

Question 12

What are the primary functions of foreign exchange markets? (2)

Answer 12

1. Facilitate the transfer of purchasing power from those deal in one currency to those who deal in another
2. To facilitate the transfer of exchange risk to professional risk takers

Question 13

Different types of exchange rates

Answer 13

1. Floating exchange rates
2. Managed float (rate allowed to move within a band)
3. Crawling peg (managed float where XR allowed to appreciate in controlled steps over time)
4. Pegged exchange rate (tied to the value of another currency
5. Fixed

Question 14

Market Structure of Foreign Exchange markets

Answer 14

OTC, Hundreds of dealers (mostly banks), transactions may occur at any time, conducted according to principles & ethics

Question 15

Define Spot & forward markets

Answer 15

Spot = foreign exchanged is sold / purchased on the spot
Forward = Parties agree to exchange a fixed amount of one currency for a fixed amount of a second currency, but the exchange / delivery happens at some forward time

Question 16

What is the balance of payments

Answer 16

a set of accounts that summarises a countries international balance of trade & the payments to and receipts from foreigners (ex - im)

Question 17

Current account =

Answer 17

1. Balance of trade (exports - imports)
2. Investment income
3. Transfers (Gifts or grants made to other countries)

Question 18

Capital account

Answer 18

Financial account - transactions that involve the purchase or sale of assets

Question 19

the three components of the current account

Answer 19

1. Balance of trade - net exchange (exports - imports)
2. Investment income (net exchange of services)
3. net transfers to & from the country (gifts and donations)

Question 20

Five factors that may cause changes in demand for exports / imports

Answer 20

1. Relative prices,
2. barriers to trade,
3. resource endowments,
4. tastes,
5. productivity

Question 21

Purchasing Power Parity

Answer 21

A concept that says the purchasing power of a currency should be equal in every country

Question 22

Eurocurrency markets

Answer 22

US dollar denominated deposits held by banks outside of US, a source of working capital for multinational firms

Question 23

LIBOR

Answer 23

relevant interest rates in eurocurrency markets
London Interbank offered rate

Question 24

Lower value of NZD =

Answer 24

more exports, increased employment, stimulates the deomestic currency, favoured by businesses, workers & farmers

Question 25

Higher value of NZD

Answer 25

1. Reduces cost of imports,
2. Puts pressure of local producers to lower their prices to meet the import competition
3. Lowers the domestic cost of living & inflation
4. Favoured by domestic consumers