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macroeconomics > money: foreign exchange > Flashcards

money: foreign exchange Flashcards

1
Q

is foreign exchange itself exchange

A

no

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2
Q

what is foreign exchange

A

financial market in which currencies are traded

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3
Q

exchange rate

A

the price at which a aprtivular currency is traded

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4
Q

bid ask spend

A

when you go to the bank and your ask price is lower than the actual excnage rate because the bank takes a cut

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5
Q

what is the world’s largest financial market by trading volume

A

foreign exchage

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6
Q

what was the average daily trading volume for FX

A

7.5 trillion for over the counter exchange market

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7
Q

makret for USD is _____. Why?

A

it is thick because people want it and people sell it

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8
Q

why does the bar for foreign exhcnage currencies add up to 200%

A

because there are two currencies (each add to 100)

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9
Q

if you are trying to buy pound with euro why would you buy dollars first

A

because of bid-ask spend. more bang for your buck essentially

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10
Q

although certain statistics have been on a decline, whats odifferent about teh dollar

A

the dollar continues to occupy a positively dominant international position

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11
Q

what are the two exchange taye regimes arhcetypes

A

free floating and fixed

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12
Q

free floating

A

exchange rate is entriely market determined without any sort of governemnt intevention

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13
Q

fixed

A

the exchange rate is entirely fixed (with respect to some other commodity)

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14
Q

where does most countries rate regime fall in terms of archetypes

A

between the two archetypes

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15
Q

does any currency float in an entriely unmanaged fashion

A

no

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16
Q

is there movement with fixed exchange rate

A

no

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17
Q

what type of archetype did US use to be

A

fixed

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18
Q

where are most currency leaning twoards in terms of archetypes

A

today - free flaoting

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19
Q

union

A

(currency)

multiple countries use same currency

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20
Q

dollarization

A

adoption, legal (driven by govnt) or factual of a forieg currency

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21
Q

what currency is most commonly aodopted

A

USD because USD is everywhere and market for it is larger on global scale

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22
Q

what are the two types of dollarization

A

full (less common) adopt currencies

partial: purchasing power decreases so firms (best inetrest) accept foreign currency fixed exchange rate

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23
Q

peg

A

currency baord but not 100% backed. trust central bank to maintain fixed exchange rate

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24
Q

band

A

specify certain goal (ie 1:7) but accept movement in either direction

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25
Q

dirty float

A

system west has adopted, no major intervention, changes overtime

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26
Q

pegged golad standard is similar to what

A

bitcoin because amount is finite

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27
Q

gold standard

A

tie specific amount of money to certina amount of gold

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28
Q

goal of gold standard

A

don’t make too much money which helps reign in inflation

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29
Q

what does pegged gold standrad depend on

A

how many people want to exchange

30
Q

what do you trust in gold standard

A

build trust in currency not getting too much to help purchasing power long term

31
Q

what occurs under gold EXCHNAGE stanadrd

A

rather than holding large quantitties of gold, each (participating) country other than the gold-issuing country hold the latter’s currency in reserves

32
Q

how many countries have true gold standard today

A

1

33
Q

reserve currency

A

certain currency held by other govnts to stabilize their own currency

34
Q

what is the reserve currency

A

Gold, USD and other currencies tied to USD

35
Q

sum up internaitonal monetary history

A

Uk adopts gold standard, many other countries follow suit. to finance war, gold standard is suspended. to restebalish gold standard they substituted scarce gold for USD and pound. to achieve reflation countries suspend (abandon) gold standard. countries pegged their currency to USD. at end US abandons gold exchange standard.

36
Q

in 1970s why did US abandon gold exchange standard

A

because we just could not print enough money (we don’t like deflation)

37
Q

since 1972 US has had a monopoly on what

A

coinage (fix vaue to gold + silver)

38
Q

BOTUS standas for

A

bank of the united states

39
Q

how did BOTUS finance civil war

A

green backs (100 dollar notes)

40
Q

when was FED founded

A

1913

41
Q

would you use a green back today since it is redeemable

A

no because it is more of an asset since you can sell on eBay for more than $100

42
Q

de facto silver standard means

A

silve value is lower than gold

43
Q

de facto gold standard means

A

gold value lower than silver, but during this period people held onto gold since it is valuable

44
Q

de jure means

A

rid of it

45
Q

pure fiat

A

what US is today. no commodity backing. we are backed by the full faith and credit of US govnt. Fed has to hold = amount of debt for each US dollar that circulates

46
Q

appreciation

A

increase of a currency’s price

47
Q

what happens if there is a positive chock to demand and a negative shock to supply

A

even higher appreciation with both

48
Q

why did purchasing power inc in 2008

A

because people everywhere lost wealth so they wanted a safe asset that would not lose vaue overtime

49
Q

what is produced abroad =

A

more expensive locally

50
Q

what happens if there is a negativeshock to demand and a positive shock to supply

A

deprecitaiont

51
Q

depreciation

A

decrease of currency price

52
Q

exchange rates are ____ driven

A

trade

53
Q

two forgeign exchange models

A

trade based and asset based

54
Q

trade based

A

everyone is trying to buy others goods

55
Q

law of one price purpose

A

so purhcaisng power of one power does not inc

56
Q

problem of law of one price

A

it assumes only exchange rate will change but price of goods will start to adjust first

57
Q

example of law of one price

A

if a computer costs 1k in US and 500pound in UK the LOOP exchange rate is Eloop = 2$/pound

58
Q

logic of LOOP

A

if price differed from Eloop buyers would exclusively purchase frin whereverthe good is cheaper. in turn demand for the cheaper currency mounts, it wil naturally appreciate

59
Q

limitation of lOOP

A

-only applies to tradable goods
-tariffs
-prices adjusting

60
Q

what is absolute PPP

A

it is LOOP but applied to all goods

61
Q

are LOOP and absolute PPP the same

A

yes except PPP is applied to all goods

62
Q

logic behind abolsute PPP

A

if goods are cheaper in one country, that countrys currency will appreciate because of demand

63
Q

limitations of absolute PPP

A

same as LOOP

64
Q

realtive PPP

A

only one with empirical bite. Assumes no change in trade barriers + transaction costs

65
Q

international finance

A

comparing local vs international rate and current vs future excahnge rate

66
Q

what is Y and X in terms of international finance

A

X is excange rate today and Y is exchange rate in year

67
Q

what is the final step of international finance

A

turn back to original currency

68
Q

what is arbitrage of international finance

A

if all conditions were known, no arbitrage conditions would hold because investors can make riskless profits

69
Q

problem with international finance

A

the Y variable is typically not known

70
Q

spot

A

you buying currency today

71
Q

forward

A

comitting to buy currecny 1yr from now

72
Q

swaps

A

combination of spot + forward

macroeconomics (26 decks)

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