International Finance & Trade Flashcards
international monetary system = ?
a system of institutions and mechanisms to foster international trade, manage the flow of financial capital and determine currency exchange rates
currency exchange markets are also known as…
forex markets
forex = ?
foreign exchange
markets where banks and institutional traders buy & sell various currencies
currency exchange rate = ?
the value of one currency relative to another
direct quotation method = ?
the number of home currency units that can be purchased with 1 foreign currency unit
indirect quotation mehthod = ?
the number of foreign currency units that can be purchased with 1 home currency unit
indirect quotation equation = ?
1/direct quotation
if AUD in dollars = $0.7156, what does that mean?
1 AUD is equivalent to 0.7156 USD
USD is more valuable
1 Euro was worth 1.4 USD and represents direct quotation where US is the home country, what is the indirect quotation?
number of foreign currency units that can be purchased with one unit of the home currency
number of euros that can be purchased with 1 USD
1/1.4 = indirect quotation = 0.714
spot exchange rate = ?
the current rate being quoted for delivery of the currency “on the spot”
can spot rates at different points be compared?
yes
this can be used to assess depreciation/appreciation
currency appreciation/depreciation = ?
currency increasing/decreasing in value
how can you calculate % change in a currency’s exchange rate?
SRt - SRt-1 / SRt-1
spot rate for USD increased from $1.09 to $1.12, what is the % change?
1.12-1.09/1.09 = 2.752%
demand curve is…
supply curve is…
demand curve is downward sloping
supply curve is upward sloping
purchasing power parity (PPP) = ?
currency of a country with a lower inflation rate will appreciate relative to a country with a higher inflation rate
expected % change in a currency is approximately equal to…?
inflation for the home country minus inflation for the foreign country
this method calculates the currency change for the foreign currency
expected % FC change equation = ?
InfRhc - InfRfc
this method calculates the currency change for the foreign currency
if US (home country) inflation rate is 3% and Euro inflation rate is 2%, what is expected change in euro value?
InfRhc - InfRfc
3% - 2% = 1% change in currency
euro would increase in value as the inflation is lower than the inflation in the US
what is the more accurate PPP relationship equation?
expected FC change % = [(1+InfRhc)/(1+InfRfc)] -1
US (HC) expected inflation = 3%
Euro (FC) expected inflation = 2%
what is the expected FC change %?
(1.03/1.02) - 1 = 0.98% change
international fisher effect = ?
currency of a country with a lower interest rate will have its currency appreciate relative to a currency with a higher interest rate
international fisher effect equation = ?
(1+intRhc / 1+intRfc) - 1 = %FC Change
intRhc = ?
interest rate of home country
intRfc = ?
interest rate of foreign country
US banks offer 5% interest rate and euro banks offer 4% interest rate
1.05/1.04 - 1 = 0.96% change
political risk = ?
risk of government confiscating assets held by foreigners
lower political risk = stronger currency
economic risk = ?
risk of slow or negative economic growth
lower economic risk = stronger currency
arbitrage = ?
(nearly) simultaneous buying of commodities, currencies and securities in one market and selling them in another for profit
euro in NYC is worth $1.14, in Brussels it’s worth $1.13
how can arbitrage be used to gain a profit?
buy euros in Brussels for $1.13 and sell them in NYC for $1.14
only really profitable when done with large sums of money
