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24 Cards in this Set
- Front
- Back
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What are the two types of exchange rates? |
Spot and forward |
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What is the spot exchange rate? |
The exchange rate for two currencies as quoted today |
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What is the forward exchange rate? |
The exchange rate as quoted for some period of time down the road E.g. if you are making future contracts, you would use the forward exchange rate, maybe 6 months down the road |
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What is the exchange currencies are often traded on called? |
The exchange that is mostly used for int'l currency market is called FOREX Links banks around the world |
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What is a flexible exchange rate? |
Exchange rate determined by the free currency market |
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What is a flexible exchange rate system? |
Central bank of country X allows the int'l currency market to determine the exchange rate of their currency, and rarely intervene in int'l markets |
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What are examples of countries that use flexible exchange rate system? |
Canada, USA |
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What factors drive demand for Canadian dollars on the currency market? |
Demand for Canadian goods/services Demand for Canadian physical assets Demand for Canadian paper assets |
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What factors drive supply of Canadian dollars on the currency market? |
Canadian demand for foreign goods/services Canadian demand for foreign physical assets Canadian demand for foreign paper assets Foreign firm demand for foreign assets bought with Canadian dollars |
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What factors shift supply/demand of Canadian dollars on the currency market? |
Real exchange rate Interest rate spread Shift in demand for Canadian products Price of oil/resource |
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What is the interest rate spread? |
Difference between Canadian and foreign interest rates Higher Canadian interest rates, relative to foreign rates, would drive demand for Canadian currency |
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Why does the price of oil and other resources affect the CAD exchange rate? |
Canada is perceived as a resource economy, with 10% of our GDP coming directly from oil and resource extraction Increase in the price of oil means an increase in price of Canadian dollars |
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What is a managed exchange rate? |
A managed exchange rate, or dirty float, is determined by the free currency market, but can be influenced by the central bank intervening by selling/buying currency/currency assets to manually appreciate/depreciate currency |
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What countries use a managed exchange rate? |
Examples could be the Swiss Franc or Chinese Yuan |
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What is a fixed exchange rate? |
A fixed exchange rate is determined by a country's central bank, and not allowed to change on the open market |
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What countries use a fixed exchange rate system? |
A good example would be Hong Kong with the Hong Kong Dollar Tied to the US dollar at a fixed rate |
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How would central banks prevent appreciation of a currency in the market? |
They would want to increase the supply of the currency Can do this by selling currency assets, or buying foreign currency |
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How would central banks prevent depreciation? |
They would need to either cut back on supply, or increase demand They could sell foreign currency assets in return for Canadian currency |
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What is the Purchasing Power Parity theory? |
In the long-run, nominal exchange rates between two countries is such that tradable goods will cost the same |
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What are the assumptions necessary to uphold the law of one price? |
Tradable goods Low cost of transportation No barriers to trade Equal cost of doing business Equally competitive markets |
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What is the PPP exchange rate? |
Exchange rate at which goods in two countries are equal
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Why does absolute PPP often not hold? |
Nontradable goods High costs of transportation Barriers to trade Tax differences Taste differences Competitive differences Volatility in nominal exchange rate |
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What is relative PPP? |
Absolute PPP will often not hold, however ratios between two countries sometimes will Countries with high inflation will experience depreciation in currency In the short run, PPP does not hold true due to volatility in nominal exchange rate |
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What is the equation for the random walk model of the exchange rate? |
Exchange rate next period = Current exchange rate + unpredictable price shock |
