Lecture 4 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 = ?
forex markets
currency exchange rate = ?
value of one currency relative to another currency
direct quotation method = ?
indicate the amount of a home country’s currency needed to purchase one unit of a foreign currency
indirect quotation method = ?
indicate the number of units of a foreign currency needed to purchase one unit of the home country’s currency
basic equation for quotations?
indirect quotation = 1/direct quotation
indirect quotation = ?
foreign currency units
direct quotation = ?
home currency value
spot exchange rate = ?
the current rate being quoted for delivery of the currency ‘on the spot’
can spot rates at different points in time be compared?
yes
currency appreciation = ?
there’s an increase in currency value
currency depreciation = ?
there’s a decrease in currency value
how are the most recent and earlier spot rate denoted?
SRt = most recent spot rate
SRt-1 = earlier spot rate
how is percentage change in spot rate calculated?
SRt - SRt-1 / SRt-1
%FC change = ?
percentage change in foreign currency
basic supply & demand relationship = ?
the current or spot exchange rate reflects the “equilibrium” rate between two currencies
equilibrium exchange rate = ?
currency exchange rate where the supply & demand for a currency are in balance
purchasing power parity (PPP) = ?
the law of one price
when currencies are exchanged, an identical product should have the same value across the globe
international fisher effect (IFE) = ?
currency of a country with a relatively lower nominal interest rate will have its currency appreciate relative to a country with a relatively higher interest rate
IntRhc = ?
nominal interest rate for the home country
IntRfc = ?
nominal interest rate for the foreign country
political risk = ?
risk associated with the possibility that a national government might confiscate or expropriate assets held by foreigners
a nation with relatively lower political risk -> relatively stronger currency
economic risk = ?
risk associated with the possibility of slow or negative economic growth, as well as variability in economic growth
a nation with higher economic growth rate & growth stability -> relatively stronger currency
arbitrage = ?
the (nearly) simultaneous purchasing of commodities, securities or currencies in one market and selling them in another where the price is higher
