International Exchange Flashcards
Which currencies are currently in the International Monetary Fund’s SDR basket?
A. U.S. dollar, Japanese yen, Swiss franc, British pound, Euro
B. U.S. dollar, Japanese yen, British pound, Euro, Chinese yuan
C. U.S. dollar, Chinese yuan, British pound, Euro, Swiss franc
D. U.S. dollar, Japanese yen, Chinese yuan, Swiss franc, Euro
Answer: B. The currencies included in the IMF’s SDR basket are the major international reserve currencies. From 1999 to 2015 these were the U.S. dollar, the Euro, the British pound and the Japanese yen. The Chinese yuan was added in November 2015. Although it is an international “safe haven” currency, the Swiss franc is not part of the SDR basket.
Why might oil and commodities exporters choose to peg their currency exchange rates to the U.S. dollar when prices are rising?
A. To dampen exchange rate volatility arising from oil and commodity price changes
B. To build up FX reserves
C. To prevent “Dutch disease,” in which inflows of investment into extractive industries drive up the exchange rate, making other export industries uncompetitive
D. All of the above
Answer: D.
Which international indicator might a British exporter to Australia wish to keep an eye on when managing FX risk?
A. Oil price
B. International market price of iron ore
C. AUD-USD exchange rate
D. All of the above
Answer: D. As Australia’s principal export is iron ore, the AUD’s exchange rate is influenced by the international price of iron ore. Shipping costs for iron ore are affected by the oil price, so the iron ore price is linked to the price of oil. Both oil and iron ore are priced in U.S. dollars, so the AUD responds to movements in the USD exchange rate. The GBP-AUD exchange rate, which the British exporter is concerned about, is thus influenced by the iron ore price, the oil price and the U.S. dollar.
Which of these central banks routinely uses capital controls to manage the currency exchange rate?
A. European Central Bank
B. Bank of Japan
C. People’s Bank of China
D. Reserve Bank of India
Answer: C. The People’s Bank of China controls the yuan’s exchange rate with a combination of capital controls and FX market intervention. The Reserve Bank of India also occasionally uses ad-hoc capital controls to dampen high exchange rate volatility, but its capital control framework is principally intended to maintain balanced trade and keep inflation under control. The European Central Bank (ECB) does not use capital controls, though two Eurozone countries have used them. However, both the Bank of Japan and the ECB use quantitative easing (QE), one effect of which is to lower their currency exchange rates.
Based on the supply and demand model of the exchange rate, which of the following should cause the Philippine peso to appreciate?
a. Concern abroad over the safety of Philippine toy exports.
b. An increase in remittances from Philippine workers abroad to their families at
home.
c. Repayment by the Philippine government of its debt to the IMF.
d. Increased imports by Philippine consumers of electronics made in Taiwan.
e. An increase in Philippine savings that is used to purchase financial assets in
Europe.
Ans: b
Define and explain the difference between Spot market, Forward market
Ans: The spot market involves transactions in the present; the forward market involves contracts today for transactions that will take place in the future.
Define and explain the difference between Real exchange rate
Nominal exchange rate
Ans: The nominal exchange rate is expressed in units of one currency per unit of the other. A real exchange rate adjusts this for changes in price levels in both currencies.
What is the balance of payments?
The balance of payments is the record of all international trade and financial transactions made by a country’s residents.
The balance of payments has three components. They are
the current account
the capital account
the financial account.
The current account measures international trade, net income on investments, and direct payments.
The capital account includes any other financial transactions that don’t affect the nation’s economic output.
The financial account describes the change in international ownership of assets.
What It Means
A country’s balance of payments tells you whether it saves enough to pay for its imports. It also reveals whether the country produces enough economic output to pay for its growth. The BOP is reported for a quarter or a year.
A balance of payments deficit means the country imports more goods, services and capital than it exports. It must borrow from other countries to pay for its imports. In the short-term, that fuels the country’s economic growth. It’s like taking out a school loan to pay for education. Your expected higher future salary is worth the investment.
In the long-term, the country becomes a net consumer, not a producer, of the world’s economic output. It will have to go into debt to pay for consumption instead of investing in future growth. If the deficit continues long enough, the country may have to sell off its assets to pay its creditors. These assets include natural resources, land, and commodities.
A balance of payments surplus means the country exports more than it imports. Its government and residents are savers. They provide enough capital to pay for all domestic production. They might even lend outside the country.
A surplus boosts economic growth in the short term. It has enough excess savings to lend to countries that buy its products. The increased exports boosts production in its factories, allowing them to hire more people.
In the long run, the country becomes too dependent on export-driven growth. It must encourage its residents to spend more. A larger domestic market will protect the country from exchange rate fluctuations. It also allows its companies to develop goods and services by using its own people as a test market.
What is the capital account?
The capital account, in international economics, is the part of the balance of payments which records all transactions made between entities in one country with entities in the rest of the world. These transactions consist of imports and exports of goods, services and capital, as well as transfer payments such as foreign aid and remittances. The BALANCE OF PAYMENTS is composed of a capital account and a current account.
The capital account indicates whether a country is importing or exporting capital. Big changes in the capital account can indicate of how attractive a country is to foreign investors and can have a big impact on exchange rates.
What is the current account?
The current account is one half of the balance of payments, the other half being the capital or financial account. While the capital account measures cross-border investments in financial instruments and changes in central bank reserves, the current account measures imports and exports of goods and services; payments to foreign holders of a country’s investments and payments received from investments abroad; and transfers such as foreign aid and remittances.
A country’s current account balance may be positive (a surplus) or negative (a deficit); in either case the capital account balance will register an equal and opposite amount. Exports are recorded as credits in the balance of payments, while imports are recorded as debits. Each credit in the current account (such as an export) will be recorded as a corresponding debit in the capital account: the country “imports” the money that a foreign buyer pays for the export.
A positive current account balance indicates that the nation is a net lender to the rest of the world, while a negative current account balance indicates that it is a net borrower. A current account surplus increases a nation’s net foreign assets by the amount of the surplus, while a current account deficit decreases it by the amount of the deficit.
Factors Affecting the Current Account
Since the trade balance (exports minus imports) is generally the biggest determinant of the current account surplus or deficit, the current account balance often displays a cyclical trend. During a strong economic expansion, import volumes typically surge; if exports are unable to grow at the same rate, the current account deficit will widen. Conversely, during a recession, the current account deficit will shrink if imports decline and exports increase to stronger economies.
The exchange rate exerts a significant influence on the trade balance, and by extension, on the current account. An overvalued currency makes imports cheaper and exports less competitive, thereby widening the current account deficit or narrowing the surplus. An undervalued currency, on the other hand, boosts exports and makes imports more expensive, thus increasing the current account surplus (or narrowing the deficit).
Are capital controls good or bad?
Capital controls are the subject of much debate. Critics believe they inherently limit economic progress and efficiency while proponents consider them prudent because they increase the safety of the economy.
Regardless, most economies have basic stopgap measures in place to prevent a mass exodus of capital outflows during a time of crisis or a massive speculative assault on the currency.
Furthermore, China is trying to organize a similar trade bloc called the Regional Comprehensive Economic Partnership, or RCEP. Luring countries into the CPTPP might keep them out of the RCEP.
Rays article
With the US out, the other TPP nations decided to plow ahead, signing a “new” Comprehensive and Progressive Agreement for Trans-Pacific Partnership, or CPTPP, in January 2018.
The CPTPP is almost identical to the original TPP. The main difference is that it no longer has those provisions Obama demanded. It will go into effect when six of the 11 signatories ratify it.
This could happen soon. Mexico, Japan, Singapore, and New Zealand were already aboard. Canada ratified it last week, and Australia is right behind.
Malaysia, Vietnam, Chile, Peru, and Brunei are in the process of approving the CPTPP as well. Even the United Kingdom is interested in joining it. (The UK is eligible because it has some Pacific territories.)
What are Capital Controls?
Capital controls are established to regulate financial flows from capital markets into and out of a country’s capital account. These controls can be economy-wide or specific to a sector or industry. Capital controls are enacted by government policy and can restrict the ability of domestic citizens to acquire foreign assets, referred to as capital outflow controls, or foreigners’ ability to acquire domestic assets, known as capital inflow controls. Tight controls are most often found in developing economies where the capital reserves are lower and more susceptible to volatility.
Most of the largest economies have liberal capital control policies and have phased out stricter rules from the past.
However, most of these same economies have basic stopgap measures in place to prevent a mass exodus of capital outflows during a time of crisis or a massive speculative assault on the currency. Global factors such as globalization and the integration of financial markets have contributed to an overall easing of capital controls. Opening up an economy to foreign capital typically provides companies with easier access to capital and can raise overall demand for domestic stocks.
