Lecture 5- Foreign Exchange markets Flashcards
What is a bilateral exchange rate?
The price of one currency in terms of another
What is a multilateral exchange rate?
The price of one currency against a basket of currencies
What does the monetary base consist of?
Net foreign assets and net domestic assets
What are net foreign assets?
Gold and foreign currencies
What are net domestic assets?
Government securities and loans on commercial banks
What is the difference between a direct and indirect currency quote?
Direct gives domestic currency/foreign currency, indirect is the other way around
What is the spread of a forex deal?
The difference between the price at which the dealer buys the currency and the price at which they sell it:
Spread = bid price - offer price
Give 4 main assumptions regarding uncovered interest parity (UIP)
- Risk neutral, so no risk premium
- Expectations formed rationally
- No capital controls
- No currency carry trade
What is currency carry trade?
Borrowing in a currency where interest rates are low and then investing in a currency with higher interest rates
