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Financial > Wk 6b > Flashcards

Wk 6b Flashcards

1
Q

What is mixed trading

A

When some currencies appreciate and others depreciate against another currency

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2
Q

What is the spot rate at the most recent date and at an earlier day

A

St and St-1

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3
Q

How is the percentage change in foreign currency calculated

A

(St - St-1/ St-1) x100

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4
Q

What is another definition for the exchange rate

A

The price of domestic currency in terms of of forgien assets

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5
Q

When is the supply curve for domestic assets vertical

A

When the amount of domestic assets can be fixed

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6
Q

When is the domestic asset supply curve upward sloping

A

When the amount of domestic assets can be changed

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7
Q

What happens at lower current values of the dollar

A

The quantity demanded of dollar assets are higher

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8
Q

Factors that influence the exchange rate

A

Percentage in the spot rate
Change in relative inflation
Change in relative income
Change in government
Change in expectations of the exchange rate

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9
Q

What happens if relative inflation rises in the US

A
  • An increase in US demanded for british goods and pounds
  • decrease in Uk desire for US goods and hence an decrease in thr supple of £
    Dollar decreases and £ increases relative inflation increases
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10
Q

What happens to bank deposits when US relative interest rates increase

A
  • US demand for British bank deposits decrease and hence the demand of the £ decreases
  • British desire for US bank deposits increases and hence the supply of the £ increases
  • Value of £ decreases and $ increases r0 to r1
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11
Q

What does relatively high interest rate reflect

A

Relatively high inflation which may discourage foreign investment

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12
Q

What is the fisher effect

A

Nominal interest rate - inflation = real interest rate

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13
Q

The next slide

A

?????

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14
Q

What happen when US income level increases

A
  • An increase US demand for British goods and services £
  • no expected change for the supply of £
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15
Q

Why may government influence the exchange rate

A
  • imposing forgien exchange barriers
  • imposing foreign trade barriers
  • intervening in the forgien exchange market and affecting macro variables such as inflation, interest rates and income levels
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16
Q

Why may expectations affect exchange rate

A
  • The market may react to news that may have a future effect
  • Many institutional investors take currency positions based on
    anticipated interest rate movements in various countries.
17
Q

What happens when people speculate on emerging markets

A

It can have substantial impact on the exchange rate

18
Q

What happens when economic signals affect the exchange rate

A

Speculators may overreact at first but eventually they make a correction

19
Q

What happens when factors interact (example)

A

an increase in income levels sometimes causes
expectations of higher interest rates, therefore placing opposing
pressures on foreign currency values.

20
Q

Next slide

A

Look at picture

21
Q

What is the sensitivity of the exchange rate dependent on

A

The volume of international transactions between the two counties

22
Q

What happens when there are large volumes of international trade

A

relative inflation rates may be more influential

23
Q

What happens when there are large values of capital flows

A

Interest rate fluctuations may be more influential to the exchange rate

24
Q

What happen if their is excess demand in the FEM

A

It causes the value of the dollar to fall

25
Q

What happens if there is excess demand

A

It causes the value of the dollar to rise

26
Q

What shifts the demand curve for domestic assets

A

Domestic interest rate
Forgien interest rate
Expected future exchange rate

27
Q

What if there is a rise in domestic interest rate

A

Shifts the demand curve to the right leading to a rise of exchange rate

28
Q

What happens if there is a rise in the forgien interest rate

A

Shifts the demand curve to the left leading to an decrease in the domestic exchange rate

29
Q

What happens to the demand curve if there is an increase in expected future exchange rate

A

Shifts the demand curve to the right leading to an increase in the exchange rate

30
Q

What happens when domestic real interest rate rises

A

The hr domestic currency appreciates

31
Q

What happens if the domestic currency rises due to an expected increase in expected inflation

A

The domestic currency depreciates

32
Q

What happen when there are changes in the money supply

A

A higher domestic money supply causes the domestic currency to depreciate.

33
Q

Next slide

A

?????

34
Q

How does speculation work

A

Between 2 currencies borrow in the weaker currency and invest in the stronger
currency providing that the interest rate difference is not too adverse

35
Q

What is the strategy of the banks who speculate

A

The simple strategy is to get out of the currency about to depreciate and into
the currency that is going to appreciate against it. Then reverse the positions
after the event to end up with more than you started with.

Financial (17 decks)

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