Partial Exam 2 Flashcards
Describe Market and currencies
Currencies are financial assets held by residents of one country and that constitute an obligation on the part of a resident of another country issuing a different currency.
Where are they traded?
Currencies are traded on the foreign exchange market (FOREX), which is where suppliers and demanders meet and establish the exchange value of the currencies in which international monetary flows are to be carried out.
What types of markets are there?
two: European and American–>
1. European: corresponds to specific locations where they negotiate currencies
2. American: is made up of the network of financial institutions around the world and transactions take place at any time and through any means of communication
What kind of participants?
International corporations, individuals, commercial banks, central banks, operators or brokers
–> JP Morgan, UBS, Deutsche Bank, HSBC
What is the Function of the foreign exchange market?
they fulfill the following primary functions:
- transfer of international payments
- -> make or receive payments derived from international economic transactions in any convertible currency
- provisions of credit
- -> ease of economic agents to obtain credit and carry out their transactions abroad
- remote payments
- -> the variety of instantaneous communication systems available to banks and other intermediary agents in the forex
What is the exchange rateß
It is the price of one currency expressed in terms of another, and it is determined through interaction of buyers and sellers of currency in the respective market, assuming that there are no exogenous forces
How is the demand of a currency build up?
The quantity of a foreign currency demanded varies inversely with its price, that is, with the exchange rate of the currency.
As the exchange rate of a foreign currency increases, its quantity demanded decreases and if the exchange rate decreases, its quantity demanded rises
–> consequently the curve of the demand for currency is downward sloping.
-> deoends on the volume of international transactions; basically it depends on the debit transactions of the balance of payments
What alters the quantity demanded?
Exchange Rate of the currency only; different to the alter of demand (shift)
What alters the demand of a currency (D)?
country’s income, in consumer tastes and preferences, prices of national goods, prices of foreign goods etc. can vary the volume of debtor items in the BoP
What causes an increase of national income?
a growth in imports; therefore, an increase in the demand for foreign exchange and a shift of the respective demand curve to the right is caused
Describe the Currency Supply curve (O)!
positive inclination since its quantity supplied varies in direct relation to the exchange rate of that currency–> higher T, higher Qs
What does effect changes in the supply curve?
changes in income of other countries, a change in the relative prices of domestic products / foreign products, an alternation in the tastes and preferences of foreign consumers; for example an increase in exports shift the curve to the left
How ist the equilibrium exchange rate determined?
by the equality between the supply and demand functions of a currency or the crossing of the corresponding curves
Why are events of political, social or economic nature importantß
they can trigger a movement of speculative nature:
- i.e.: the value of a currency is rising and speculators rush to buy that currency waiting for its exchange rate to rise further, thereby accelerating the upward process of that currency (destabilizing)
- exchange rate of a currency is increasing and speculators believe that in the immediate future its exchange rate will fall, rushing to sell that currency, thereby contributing to said exchange rate stabilizes (stabilizing)
Describe Currency trading? difference “bid” and “offer”?
buy position = bid
-> price at which the entity will buy the currency
sell position = offer
-> price at which the entity will sell the currency to us
bid < offer always
