Vecka 2 sammanfattningar del 4 Flashcards
What are spot trades?
Then the trading is settled immediately.
What can the exchange rate be thought as?
an asset price itself because it is the relative price of two assets.
What is The basic principle of asset pricing?
that an asset’s current value depends on its expected future purchasing power.
What are savers looking at when evaluating an asset?
The expected rate of return it offers, that is, the rate at which the value of an investment in the asset is expected to rise over time. They care about the real rate of return.
What does The returns on deposits traded in the foreign exchange market depend on?
interest rates and expected exchange rate changes.
What does Equilibrium in the foreign exchange market require?
interest parity
What is interest parity?
When deposits of all currencies must offer the same expected rate of return when returns are measured in comparable terms.
What does the interest parity condition tells us?
the current equilibrium exchange rate.
What happens When the expected dollar return on euro deposits exceeds that on dollar deposits?
the dollar immediately depreciates against the euro.
What does a dollar depreciation today do?
It reduces the expected dollar return on euro deposits by reducing the depreciation rate of the dollar against the euro expected for the future.
What happens when the expected return on euro deposits is below that on dollar deposits?
The dollar must immediately appreciate against the euro.
What does a dollar appreciatrion do?
Makes euro deposits more attractive by increasing the dollar’s expected future depreciation against the European currency.
What does a rise in dollar interest rates causes?
The dollar to appreciate against the euro
What does a rise in euro interest rates causes?
The dollar to depreciate against the euro.
What does changes in expected future level do today?
Today’s exchange rate rise or fall according to the expectations.
