LM8: Currency Exchange Rates Flashcards
What does EUR/GBP of 1.15 MEAN?
It means EUR 1.15 per GBP
What is a Nominal exchange rate?
The quoted currency exchange rate at any point in time.
What is a Real exchange rate?
The adjusted nominal exchange rate for inflation in each country compared to a base period.
What is the formula for the Real exchange rate?
What is the formula for the Forward exchange rate?
What is formal dollarisation?
Official dollarization implies that the country’s government and monetary authorities have accepted a foreign currency as its legal tender
What is a Monetary union?
Several countries adopt the same currency, e.g. European Union.
What is a Currency board system?
Commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate.
What is a Fixed parity/fixed peg system?
A country pegs its own currency with a foreign currency (or a basket of currencies) within a +/- 1% margin.
What is a Target zone system?
Similar to fixed parity, but with a wider margin (+/- 2%).
What is a Crawling peg system?
Exchange rate is pegged but adjusted periodically.
What is a Crawling bands system?
Gradually increasing the margins of the fixed peg bands to transition from fixed peg to floating rate.
What is a Managed float system?
Monetary authority intervenes to manage exchange rate without any specific target level.
What is an Independently floating system?
Market-driven exchange rate.
What is the Forward premium equation?
= (F-S)/S x 12/N
