Group 1 Report Flashcards
Refer to the value at which one currency can be exchanged for another. It represents the rate of conversion between two currencies and determines
the relative value of one currency in terms of
another.
Exchange Rates
are essential in international
trade, investment, and finance as they facilitate the
exchange of goods, services, and capital between
countries.
Exchange rates
is a complex task that involves analyzing numerous
factors, including economic indicators, political events,
market sentiment, and technical analysis.
Forecasting Exchange Rates
7 Common ways to Forecast Currency Exchanges Rates
(1) Fundamental Analysis
(2) Technical Analysis
(3) Relative Economic Strength Model
(4) Econometric Model
(5) Purchasing Power Parity (PPP)
(6) Interest Rate Parity
(7) Balance Payment Theory
This forecast method includes all
the external factors such as
monetary policy, domestic and
foreign government policy, and
global economic and political
conditions.
Fundamental Analysis
This approach doesn’t consider
the influence of external forces.
Rather, it uses patterns
discovered from historical price
data and statistics to forecast
future movement.
Indicators,
trendlines, and candlestick and
chart patterns are essential
instruments of technical
analysis
Technical Analysis
This approach looks at the strength of economic growth in different
countries in order to forecast the direction of exchange rates.
The rationale behind this approach is based on the idea that a strong
economic environment and potentially high growth are more likely to
attract investments from foreign investors.
Relative Economic Strength Model
This FX rate forecast method is
personal, as it differs between
traders. Here, Forex traders select
whatever metrics they believe
influence the currency market the
most.
Econometric Model
While the relative economic strength
approach gives a direction for currency
movement, _____________________
says what the rate is supposed to be.
Purchasing Power Parity
This method asserts that the price of
goods and services should be equal,
regardless of the country.
If there are
any differences in price, a trader can
calculate the suitable exchange rate
that will make goods or services cost
the same.
Purchasing Power Parity
is quite similar to purchasing power parity. But PPP
focuses on the prices of goods, while _____ focuses on currency and interest rates.
Interest Rates Parity
The general concept of this model is that the differential between interest rates
should equal the differential between spot and forward exchange rates.
Interest Rate Parity
if an investor exchanges a domestic currency for a foreign one and invests it
in a foreign economy or uses a domestic currency to invest in the home country
and converts the proceeds from the investment into a foreign currency, their
earnings will be the ______ in both cases.
Same
This foreign exchange model determines future currency values by considering a
country’s rate of imports and exports.
The theory behind this method is that the
domestic currency appreciates when it exports more than it imports and
depreciates when the opposite occurs.
Balance Payment Theory
Measuring Exposure to Exchange Rates Fluctuations
(1) Purchasing Power Parity Argument
(2) The Investor Hedge Argument
(3) Stakeholder Diversification Argument
(4) Currency Diversification Argument
Types of Exposure
(1) Transaction Exposure
(2) Economic Exposure
(3) Translation Exposure
Involves using financial tools or strategies to protect
against potential losses caused by changes in exchange
rates.
It is commonly used by individuals, businesses, or
investors involved in international trade or holding
foreign assets.
Hedging Exposure to Exchange Rates Fluctuations
is a strategy that seeks to limit risk exposures in financial assets.
Hedge
is a strategy for reducing exposure to investment risk.
Hedging
The goal of hedging isn’t to make money; it’s to ______ from losses.
protect
________ commonly referred to as exchange-rate risk. arises from the change in price of one currency in relation to another.
Currency risk
Investors or companies that have assets or
business operations across national borders are
exposed to currency risk that may create
____________________________
unpredicted profits and losses.
Ways to Hedge Exchange Rate Exposure
(1) Currency Options
(2) Currency swaps
(3) Forward Contracts
(4) Natural Hedging
Provides the holder with the right,
but not the obligation, to buy or
sell a specific amount of a
currency at a predetermined
exchange rate within a specified
time period.
Currency options
