International Finance & Trade

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 are also known as…

Answer 2

forex markets

Question 3

forex = ?

Answer 3

foreign exchange

markets where banks and institutional traders buy & sell various currencies

Question 4

currency exchange rate = ?

Answer 4

the value of one currency relative to another

Question 5

direct quotation method = ?

Answer 5

the number of home currency units that can be purchased with 1 foreign currency unit

Question 6

indirect quotation mehthod = ?

Answer 6

the number of foreign currency units that can be purchased with 1 home currency unit

Question 7

indirect quotation equation = ?

Answer 7

1/direct quotation

Question 8

if AUD in dollars = $0.7156, what does that mean?

Answer 8

1 AUD is equivalent to 0.7156 USD

USD is more valuable

Question 9

1 Euro was worth 1.4 USD and represents direct quotation where US is the home country, what is the indirect quotation?

Answer 9

number of foreign currency units that can be purchased with one unit of the home currency

number of euros that can be purchased with 1 USD

1/1.4 = indirect quotation = 0.714

Question 10

spot exchange rate = ?

Answer 10

the current rate being quoted for delivery of the currency “on the spot”

Question 11

can spot rates at different points be compared?

Answer 11

yes

this can be used to assess depreciation/appreciation

Question 12

currency appreciation/depreciation = ?

Answer 12

currency increasing/decreasing in value

Question 13

how can you calculate % change in a currency’s exchange rate?

Answer 13

SRt - SRt-1 / SRt-1

Question 14

spot rate for USD increased from $1.09 to $1.12, what is the % change?

Answer 14

1.12-1.09/1.09 = 2.752%

Question 15

demand curve is…
supply curve is…

Answer 15

demand curve is downward sloping
supply curve is upward sloping

Question 16

purchasing power parity (PPP) = ?

Answer 16

currency of a country with a lower inflation rate will appreciate relative to a country with a higher inflation rate

Question 17

expected % change in a currency is approximately equal to…?

Answer 17

inflation for the home country minus inflation for the foreign country

this method calculates the currency change for the foreign currency

Question 18

expected % FC change equation = ?

Answer 18

InfRhc - InfRfc

this method calculates the currency change for the foreign currency

Question 19

if US (home country) inflation rate is 3% and Euro inflation rate is 2%, what is expected change in euro value?

Answer 19

InfRhc - InfRfc

3% - 2% = 1% change in currency

euro would increase in value as the inflation is lower than the inflation in the US

Question 20

what is the more accurate PPP relationship equation?

Answer 20

expected FC change % = [(1+InfRhc)/(1+InfRfc)] -1

Question 21

US (HC) expected inflation = 3%
Euro (FC) expected inflation = 2%

what is the expected FC change %?

Answer 21

(1.03/1.02) - 1 = 0.98% change

Question 22

international fisher effect = ?

Answer 22

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

Question 23

international fisher effect equation = ?

Answer 23

(1+intRhc / 1+intRfc) - 1 = %FC Change

Question 24

intRhc = ?

Answer 24

interest rate of home country

Question 25

intRfc = ?

Answer 25

interest rate of foreign country

Question 26

US banks offer 5% interest rate and euro banks offer 4% interest rate

Answer 26

1.05/1.04 - 1 = 0.96% change

Question 27

political risk = ?

Answer 27

risk of government confiscating assets held by foreigners

lower political risk = stronger currency

Question 28

economic risk = ?

Answer 28

risk of slow or negative economic growth

lower economic risk = stronger currency

Question 29

arbitrage = ?

Answer 29

(nearly) simultaneous buying of commodities, currencies and securities in one market and selling them in another for profit

Question 30

euro in NYC is worth $1.14, in Brussels it’s worth $1.13

how can arbitrage be used to gain a profit?

Answer 30

buy euros in Brussels for $1.13 and sell them in NYC for $1.14

only really profitable when done with large sums of money