Foreign Exchange Rate Flashcards
(29 cards)
What is the foreign exchange rate?
The value of one country’s currency expressed in another country’s currency.
What factors commonly determine the exchange rate between two currencies?
- Interest rates
- Economic activity
- Gross domestic product
- Unemployment rate
How are most exchange rates defined?
As floating, meaning their values rise or fall based on supply and demand in the foreign exchange market.
What is the current exchange rate between the US dollar and euro?
1.10
How do exchange rates fluctuate?
They can either be free-floating or fixed.
What characterizes a free-floating exchange rate?
It rises and falls due to changes in the foreign exchange market.
What is a fixed exchange rate?
It is pegged to the value of another currency.
What is the spot rate in exchange rates?
The current market value.
What is the forward value in exchange rates?
Based on expectations for the currency to rise or fall vs. its spot price.
How do changes in exchange rates affect businesses?
They increase or decrease the cost of supplies and finished products purchased from another country.
What is the Forex market?
An over-the-counter marketplace for trading currencies.
What is a restricted currency?
A currency with its value set by the government and restricted to exchange within its borders.
What does it mean for a currency to appreciate?
When a currency becomes more valuable relative to another currency.
What does it mean for a currency to depreciate?
When the value of a currency decreases relative to another currency.
What are floating exchange rates?
When the exchange rates of currencies are determined in free markets by the interaction of supply and demand.
What are the two main factors impacting exchange rates?
- The domestic currency value
- The foreign currency value
What is a direct quotation in exchange rates?
Quoting the price of a unit of foreign currency in terms of domestic currency.
What is an indirect quotation in exchange rates?
Expressing the price of a domestic currency in terms of foreign currency.
What are cross rates?
A method of quoting exchange rates using various foreign currency exchange rates to imply a domestic exchange rate.
Why are exchange rates important?
- Interest rates
- Inflation rates
- Government debt
- Political stability
- Recession
What effect do changes in interest rates have on currency value?
Higher interest rates increase demand for domestic currency.
How do higher inflation rates affect domestic currency demand?
They decrease demand since the currency’s value depreciates faster.
How does government debt impact exchange rates?
Higher debt reduces the likelihood of acquiring foreign capital, putting downward pressure on currency value.
Why does political stability matter for exchange rates?
It attracts foreign investors and reduces investment risk.
