Lecture 4

Question 1

international monetary system = ?

Answer 1

a system of institutions and mechanisms to foster international trade, manage the flow of financial capital, and determine currency exchange rates

Question 2

currency exchange markets = ?

Answer 2

forex markets

Question 3

currency exchange rate = ?

Answer 3

value of one currency relative to another currency

Question 4

direct quotation method = ?

Answer 4

indicate the amount of a home country’s currency needed to purchase one unit of a foreign currency

Question 5

indirect quotation method = ?

Answer 5

indicate the number of units of a foreign currency needed to purchase one unit of the home country’s currency

Question 6

basic equation for quotations?

Answer 6

indirect quotation = 1/direct quotation

Question 7

indirect quotation = ?

Answer 7

foreign currency units

Question 8

direct quotation = ?

Answer 8

home currency value

Question 9

spot exchange rate = ?

Answer 9

the current rate being quoted for delivery of the currency ‘on the spot’

Question 10

can spot rates at different points in time be compared?

Answer 10

yes

Question 11

currency appreciation = ?

Answer 11

there’s an increase in currency value

Question 12

currency depreciation = ?

Answer 12

there’s a decrease in currency value

Question 13

how are the most recent and earlier spot rate denoted?

Answer 13

SRt = most recent spot rate
SRt-1 = earlier spot rate

Question 14

how is percentage change in spot rate calculated?

Answer 14

SRt - SRt-1 / SRt-1

Question 15

%FC change = ?

Answer 15

percentage change in foreign currency

Question 16

basic supply & demand relationship = ?

Answer 16

the current or spot exchange rate reflects the “equilibrium” rate between two currencies

Question 17

equilibrium exchange rate = ?

Answer 17

currency exchange rate where the supply & demand for a currency are in balance

Question 18

purchasing power parity (PPP) = ?

Answer 18

the law of one price

when currencies are exchanged, an identical product should have the same value across the globe

Question 19

international fisher effect (IFE) = ?

Answer 19

currency of a country with a relatively lower nominal interest rate will have its currency appreciate relative to a country with a relatively higher interest rate

Question 20

IntRhc = ?

Answer 20

nominal interest rate for the home country

Question 21

IntRfc = ?

Answer 21

nominal interest rate for the foreign country

Question 22

political risk = ?

Answer 22

risk associated with the possibility that a national government might confiscate or expropriate assets held by foreigners

a nation with relatively lower political risk -> relatively stronger currency

Question 23

economic risk = ?

Answer 23

risk associated with the possibility of slow or negative economic growth, as well as variability in economic growth

a nation with higher economic growth rate & growth stability -> relatively stronger currency

Question 24

arbitrage = ?

Answer 24

the (nearly) simultaneous purchasing of commodities, securities or currencies in one market and selling them in another where the price is higher