Topic 4: Exchange Rates

Question 1

What is the direct spot rate?

Answer 1

S(d/f)

The amount of home dollars you get per foriegn dollar.

An increase in this is a depreciation for the domestic currency.

Question 2

What is the indirect spot rate?

Answer 2

S(f/d)
As seen on the Australian stock exchange.

The amount of foriegn currency recieved per domestic dollar.

Question 3

What is S(d/f)

Answer 3

• The direct spot rate.
• The domestic currency recieved per foriegn currency sacrificed.
• The value of the foriegn currency.

Question 4

What is S(f/d)

Answer 4

• The indirect spot rate.
• The value of the domestic currency.
• The foreign currency recieved per australian dollar sacrificed.

Question 5

A spot rate is 1 USD = 1.65 AUD.

Identify the form of this rate.

Answer 5

From the Australian perspective this is a direct spot rate.

S(d/f) = S(1.65) = 1.65.

Question 6

A sport rate is 1 Aud = 72 JPY

What form is this rate in?

Answer 6

From the Australian perspective this is an indirect rate:

S(f/d) = S(72/1) = 72.

Question 7

What is the banks buy and sell rates? Which will be higher? How are they quoted?

Answer 7

• They are typically quoted in the indirect form.
• The sell rate will be lower then the buy rate.
• ie, Sell S(f/d)
• To make a profit, it will sell the foriegn currency at a higher price (in terms of domestic currency) then the price it pays to acquire it. This means it must sell at a lower indirect spot rate then it buys at.

Question 8

Consider the following spot rates:

GDP/AUD: 0.3706 - 0.3796

Which is the buy and sell rate for an Australian bank?

Answer 8

The first rate, 0.3706 is the sell rate.

The second rate, 0.3796 is the buy rate.

i.e. The bank sells GDP at a higher price (lower indirect spot rate) then the price it buys GDP at.

Question 9

Consider the following rates:

AUD / SGD: 0.9387 - 0.9737.

Which is the buy rate, and which the sell rate for an Australian bank?

Answer 9

The first rate (0.9387) is the buy rate.

The second rate (0.9737) is the sell rate.

i.e. To make a profit, the bank sells SGD at a higher price (in terms of Australian dollars) then which it buys at.

Question 10

From the Australian perspective the direct spot rate for the GBP is 2.

A firm has a foriegn asset worth 6 million pounds.

What is it’s current domestic currency value?

Answer 10

12 million Australian dollars.

Question 11

What is an exchange rate relative?

Answer 11

The percentage change in an exchange rate over some period of time.

Question 12

How do you calculate an exchange rate relative?

Answer 12

V_it = S_it / S_i0

Question 13

How do you calculate a trade weighted index?

Answer 13

Get the exchange rate relatives.

Multiple relatives by weights, which normally come from trade.

We typically use a Laspeyres index. (Weights from base period.)

Question 14

What is the RBA’s trade weighted index called?

Answer 14

The Trade Weighted Index.

It’s a Laspeyers index.

Question 15

Define the real exchange rate.

Answer 15

The nominal exchange rate adjusted for differences in international prices.

Question 16

What is the real exchange rate equation?

Answer 16

E_R(^X/_Y) = S(^X/_Y) P_Y/P_X

Note: E_R can also be denoted Q.

Question 17

How can a percentage change in the real exchange rate be approximated?

Answer 17

%ΔQ(^X/_Y) = %ΔS(^X/_Y) + %ΔP_Y - %ΔP_X