Th4.1: Exchange Rates

Question 1

What is an exchange rate?

Answer 1

the purchasing power of a currency in terms of what it can buy of other currencies

Question 2

What are four various ways exchange rates can be expressed?

Answer 2

spot exchange rate
forward exchange rate
bilateral exchange rate
exchange rate index (EER)

Question 3

Spot exchange rate

Answer 3

the actual exchange rate of a currency at current prices, which can change on a minute to minute basis

Question 4

Forward exchange rate

Answer 4

involve providing a currency at some point in the future for an agreed rate - usually used by companies who want to reduce uncertainty and know the actual cost they will pay

Question 5

Bilateral exchange rate

Answer 5

the value of one currency against another e.g £1 = $2

Question 6

Exchange rate index (EER)

Answer 6

shows the value of a currency against a basket of currencies weighted against the proportion of trade that the country does with each currency and gives an indication of the overall strength of the currency in the market