Term
| Asset market approach to exchange rates |
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Definition
| A theory of what determines exchange rates (or places pressure on exchange rate values) that emphasizes the role of portfolio repositioning by international financial investors |
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Term
| Purchasing power parity (PPP) |
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Definition
| A theory of what determines exchange rates (or what exchange rate values should be) that emphasizes goods and services prices quoted in different currencies. The exchange rate value between two currencies should be based on the prices of products in one of the countries (as these prices are quoted in this country's currency) relative to the prices of products in the other country (as these prices are quoted in the other country's currency). |
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Term
| Monetary approach to exchange rates |
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Definition
| rates A theory of what determines exchange rates (or places pressure on exchange rate values) that emphasizes the role of money supplies and money demands in the countries. |
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Term
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Definition
| Investors and speculators base their expectations of future exchange rate values on the continuation of the recent trend in the exchange rate value. |
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Term
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Definition
| The proposition that a product that is easily and freely traded should have the same price everywhere, once the prices at different places are expressed in the same currency by using the appropriate spot exchange rates. |
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Term
| Absolute purchasing power parity |
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Definition
| The proposition that a basket or bundle of tradable products will have the same cost in different countries if the costs are stated in the same currency by using the appropriate spot exchange rate. |
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Term
| Relative purchasing power parity |
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Definition
| The proposition that the difference between changes over time in product-price levels in two countries will be offset by the change in the exchange rate value between the two countries' currencies over this time. The rate of appreciation of the exchange rate value of a country's currency will equal the amount by which this country's inflation rate is less than the other country's inflation rate |
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Term
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Definition
| A country's money supply is equated to the demand for the country's money, and the demand for money is directly proportional to the money value of the country's gross domestic product. |
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Term
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Definition
| A theory of exchange rate changes in which international investors react rationally to news or a shock (such as a large change in a country's money supply) by driving the exchange rate to change quickly by more than it should change in the new long run equilibrium (so that it jumps past this new long-run equilibrium value), and then the exchange rate value slowly reverts to this new long-run equilibrium value |
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Term
| Nominal bilateral exchange rate |
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Definition
| The exchange rate measured as the number of units of one currency per unit of the other currency. (This is the regular exchange rate as quoted in the foreign exchange market.) |
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Term
| Nominal effective exchange rate |
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Definition
| The weighted average exchange rate value of a country's currency (measured using the set of nominal bilateral exchange rates between this country's currency and each of the various foreign currencies included in the average). |
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Term
| Real bilateral exchange rate |
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Definition
| The exchange rate value of a country's currency relative to the currency of one other country adjusted for product price levels in each of the two countries (and measured relative to the relationship among the exchange rate and the two country's product price levels that existed in a chosen base year). |
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Term
| Real effective exchange rate |
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Definition
| The weighted average of the real bilateral exchange rates between the country and each of a set of foreign countries. |
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Term
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Definition
| An ongoing one-directional movement in the value of an exchange rate that appears to be driven by a bandwagon, so that the resulting exchange rate value appears to be inconsistent with any form of economic fundamentals |
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Term
| The exchange rate value of foreign currency is raised in the short run by the following changes: |
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Definition
A.A rise in the foreign interest rate relative to our interest rate.
B.A rise in the expected future spot exchange rate. |
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Term
| The price of foreign currency in units of our currency is raised in the long run by the following changes: |
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Definition
A.A rise in our money supply relative to foreign money supply.
B.A rise in foreign domestic product relative to our real domestic product. |
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Term
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Definition
| The set of accounts recording all flows of value between a country's residents and residents of the rest of the world, during a period of time |
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Term
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Definition
| In a balance of payments transaction, an item for which the country must be paid. It is the item that the country is giving up in the transaction, and it is measured with a positive sign. |
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Term
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Definition
| In a balance of payments transaction, an item for which the country must pay. It is the item that the country is receiving in the transaction, and it is measured with a negative sign. |
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Term
| Goods and services balance |
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Definition
| The sum of all credit and debit items that are exports and imports of goods and services. Also called net exports or the trade balance. |
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Term
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Definition
| The sum of all credit and debit items that are exports and imports of goods and services, income flows, and unilateral transfers |
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Term
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Definition
| The sum of all credit and debit items that are flows of financial assets and similar claims (excluding official international reserve assets flows). |
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Term
| Official international reserve assets |
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Definition
| Money-like assets that are held by governments (especially central banks) and that are recognized by governments as fully acceptable for payments between them. |
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Term
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Definition
| The increase the country's foreign financial assets minus the increase in the country's foreign financial liabilities |
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Term
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Definition
| A measure of whether the country's balance of payments has achieved an composition that is sustainable over time. The indicator of this that is often used is the official settlements balance |
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Term
| Official settlements balance |
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Definition
| The sum of the current account balance and the (nonofficial) capital account balance |
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Term
| International investment position |
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Definition
| A statement of the stocks of a country's international assets and foreign liabilities at a point in time |
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Term
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Definition
| Unpredictable changes in future exchange rates can cause the value of the income, wealth, or net worth of a person (or organization like a firm) to change |
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Term
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Definition
| The act of reducing exposure to exchange rate risk (or any other rate risk), by reducing or eliminating any net asset position or net liability position in the foreign currency. |
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Term
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Definition
| The act of taking a net asset position or a net liability position in a foreign currency (or any other asset class), to attempt to make a profit from the position |
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Term
| Forward foreign exchange contact |
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Definition
| An agreement to exchange one currency for another currency on a specified date in the future at a price that is set at the time that the agreement is reached (this price is the forward exchange rate). |
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Term
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Definition
| The price that is set now for an exchange of one money for another that will occur at a specified date in the future |
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Term
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Definition
| A contract traded on an organized exchange, to buy or sell a standard amount of foreign currency at a standard (maturity) date in the future. |
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Term
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Definition
| A contract that gives its buyer (or holder) the right, but not the obligation, to buy foreign currency (a call option) or to sell foreign currency (a put option) at some time in the future, at a price that is set today |
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Term
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Definition
| A contract that establishes a sequence of exchanges of two different currencies during a specified period of time. A set of a spot exchange and two or more forward foreign exchanges packaged into a single contract |
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Term
| Covered international investment |
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Definition
| A foreign-currency financial investment in which a forward foreign exchange contract is used to eliminate the exposure to exchange rate risk. |
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Term
| Uncovered international investment |
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Definition
| A foreign-currency financial investment which is exposed to exchange rate risk. |
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Term
| Covered interest differential |
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Definition
| The difference between the overall covered return on a foreign-currency financial investment and the return on a comparable domestic-currency investment |
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Term
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Definition
| The proportionate difference between the current forward exchange rate value of a currency and its current spot exchange rate value |
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Term
| Covered interest arbitrage |
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Definition
| The process of buying a country's currency spot and selling it forward, to make profit from a non-zero covered interest differential |
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Term
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Definition
| The equilibrium condition that the covered interest differential is zero |
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Term
| Expected uncovered interest differential |
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Definition
| The difference between the overall expected return on a foreign-currency financial investment and the return on a comparable domestic-currency investment |
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Term
| Uncovered interest parity |
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Definition
| parity The condition that the expected uncovered interest differential is zero |
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Term
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Definition
| controls Governmentally imposed restrictions (limits or requiring approvals) on the ability of international financial investors to transfer moneys in or out of the country |
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Term
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Definition
| A bank deposit that is not subject to the usual government regulations imposed by the country of the currency in which the deposit is denominated |
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Term
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Definition
| The act of trading different countries' moneys. Also, the holdings of foreign currencies. |
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Term
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Definition
| The price of one country's money in terms of another country's money |
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Term
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Definition
| The price for "immediate" exchange of one money for another. (For standard large trades, immediate means in one or two days.) |
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Term
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Definition
| The price that is set now for an exchange of one money for another that will occur at a specified date in the future. |
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Term
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Definition
| A package trade that includes a spot exchange of two currencies and the reverse forward exchange of the two currencies |
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Term
| Floating exchange rate system |
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Definition
| The spot exchange rate between two currencies is market-driven and determined by private (or nonofficial) demand and supply for the two currencies. |
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Term
| Fixed exchange rate system |
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Definition
| Government officials select a central value or par value for the spot exchange rate and attempt to keep the actual exchange rate at this value or within a narrow band around this value |
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Term
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Definition
| A decrease in the exchange rate value of a currency, under a floating rate system. |
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Term
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Definition
| An increase in the exchange rate value of a currency, under a floating rate system. |
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Term
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Definition
| A decrease in the par value of a currency, under a fixed rate system |
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Term
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Definition
| An increase in the par value of a currency, under a fixed rate system. |
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Term
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Definition
| The process of buying something at a low price and reselling it at a higher price, to make a (nearly) riskless profit |
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Term
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Definition
| The process of making a profit from a discrepancy among the three exchange rates that exist for three currencies |
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Term
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Definition
| is a flow for which a country is paid. |
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Term
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Definition
| is a flow for which the country must pay |
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Term
| Three major broad categories of items that define the three major parts of a countries balance of payments |
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Definition
| The current account, The capital account, and changes in official international reserves. |
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Term
| Balance that is positive is called a: |
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Definition
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Term
| Balance that is negative is called a: |
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Definition
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Term
| A country can do two things with it national savings: |
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Definition
| Invest at home in domestic capital formation, Invest abroad in net foreign investment |
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Term
| A countries current account balance is linked to: |
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Definition
| domestic production, income, and expenditure. |
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Term
| If a country has a current account surplus |
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Definition
| its foreign assets are growing faster than its foreign liabilities. |
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Term
| If a country has a current account deficit |
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Definition
| its foreign liabilities are growing faster than its foreign assets |
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Term
| What does it mean for a country with a current account surplus? |
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Definition
The country is acting as a net lender to or an investor to the rest of the world.
The country is saving more than it is investing domestically. The country is producing more than it is spending on goods and services |
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Term
| Instead of gold the majority of countries’ official reserve assets are now |
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Definition
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Term
| A countries current account balance must equal |
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Definition
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Term
| Trading done between banks active in the market called |
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Definition
| The interbank part of the market |
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Term
| Trading done with customers is called |
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Definition
| The retail part of the market |
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Term
| Over half of foreign exchange trading is |
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Definition
| among banks themselves in the interbank part of the foreign exchange market |
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Term
| A person holding a net asset position (a long position) or a net liability position (a short position) in a foreign currency is exposed to |
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Definition
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Term
True or False
A negative foreign investment on this year's balance of payments means the country is a net debtor. |
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Definition
| False, a net debtor is a country that has had mostly negative net foreign investment in the past, not necessarily this year. |
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Term
True or False
A nation running a current account surplus is accummulating foreign assets. |
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Definition
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Term
True or False
Because the balance of payments accounts must balance, sub-accounts like capital accounts must balance too. |
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Definition
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Term
True or False
If GDP, consumption, and domestic investment are all constant, an increase in government spending will cause the country to run a trade deficit. |
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Definition
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Term
| An economic transaction is recorded in the balance of payments as a credit if it leads to |
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Definition
| The receipt of payment from foreigners. |
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Term
| Borrowing from abroad is a |
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Definition
| capital import and therefore a credit item. |
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Term
| If a country's net foreign investment amounts to -$15 billion, this implies an equivalent |
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Definition
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Term
True or False
An increase in U.S. imports from France will give rise to a supply of francs in exchange for dollars. |
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Definition
| False, to purchase the imports we supply dollars in exchange for francs |
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Term
True or False
Central bank intervention is more prevalent under a floating exchange rate system than under a pegged exchange rate system. |
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Definition
| False, intervetion is more prevelant under pegged rates. |
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Term
True or False
If Americans suddenly refuse to lend money to Mexico, we would expect the dollar to appreciate relative to the peso. |
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Definition
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Term
True or False
Art appreciation has nothing to do with exchange rates. |
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Definition
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Term
True or False
If a currency is undervalued in a fixed exchange rate system, officials from that country's central bank will have to sell thier currency to keep it pegged. |
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Definition
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Term
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Definition
| A currency used to facilitate an indirect trade between two other currencies. The U.S. Dollar is often used as a vehicle currency. |
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Term
| If a dollar equals 400 Mexican pesos in the foreign exchange market, what is the value of one peso? |
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Definition
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Term
| Suppose the exchange rate between the Canadian dollar (C$) and the American dollar (US$) changes from C$1.340/US$ to C$1.325/US$, but the Canadian government wants to maintain a fixed exchange rate of C$1.340/US$. What should the bank of Canada do? |
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Definition
| Sell Canadian dollars (buy US dollars) |
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Term
| When American residents buy bonds from Her Majesty's Treasury in London, the foreign exchange market will give rise to |
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Definition
| a supply of American dollars. |
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Term
| The demand curve slopes downward because |
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Definition
| at lower exchange rates, foreign goods look cheaper to home country residents. |
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Term
True or False
The foreign exchange rate is the same as the future spot rate |
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Definition
| False, The forward rate may approximate what investors think it will be, but it will not determine the actual future spot rate. |
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Term
True or False
Speculation means only taking a short position, not a long position. |
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Definition
| False, speculation may occur through both short and long positions. |
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Term
True or False
If German interest rates are higher than American interest rates, we would expect the Euro to be at a forward discount relative to the dollar. |
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Definition
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Term
True or False
Hedgehogs are afraid of risk |
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Definition
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Term
True or False
If the speculator believes that the future spot rate on the Britsh pound will be higher than the current forward rate, the speculator will buy the pound forward. |
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Definition
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Term
| Covered interest parity is a condition where |
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Definition
| the forward value of a currency will tend to exceed it's spot value by the same percentage as its interest rate is lower than its foreign interest rates. |
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Term
| Suppose you are an established speculator with an excellent reputation, but currently without liquid funds. You belive the dollar is going to appreciate. What would you do? |
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Definition
| Sell foreign (nondollar) currencies forward. |
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Term
True or False
An expectation that the Yen will appreciate will cause the Yen to appreciate. |
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Definition
| True, this is one of the "Self-fufilling prophesies" in economics |
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Term
True or False
An increase in the domestic rate will cause the home currency to depreciate. |
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Definition
| False, the home currency will appricate as investors buy assets demoninated in home currency |
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Term
| If the law of one price holds, then we would expect that if one dollar exchanges for four yen and if a computer costs $1000 in the United States, then in Japan, the computer should cost: |
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Definition
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Term
| The monetary approach to exchange rates is generally: |
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Definition
| successful in explaining long-run exchange rates, but is bad at explaining short-run exchange rates. |
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Term
| The quantity theory of money would predict that a 23% increase in Country A's money supply should eventually lead to a: |
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Definition
| 23% decrease in the exchange rate value of the currency. |
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Term
| Purchasing power parity predicts that when the difference between the United States' inflation rate and that of another country increases: |
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Definition
| the foreign currency should appreciate |
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Term
| Purchasing power parity is more accurate in the long-run than in the short-run because |
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Definition
| it takes time for currency markets to adjust to changes in price level |
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Term
| If foreign interest rates increase, what implications would that have on the direction of international financial repositioning and on the current spot exchange rate? |
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Definition
| repositioning towards foreign currency assets and the domestic currency depreciates |
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Term
| If the expected future spot rate of a currency decreases, what implications would that have on the direction of international financial repositioning and on the current spot exchange rate? |
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Definition
| repositioning towards domestic currency assets and the domestic currency appreciates |
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Term
| If the current domestic interest rate increases, what implications would that have on the direction of international financial repositioning and on the current spot exchange rate? |
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Definition
| repositioning towards domestic currency assets and the domestic currency appreciates |
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Term
True or False
The asset market approach explains exchange rates as being part of the equilibrium for the markets for financial assets denominated in different currencies |
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Definition
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Term
True or False
A decrease in the difference between the foreign interest rate and the domestic interest rate can be expected to lead to an increase in the spot interest rate |
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Definition
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Term
True or False
Relative purchasing power parity states that international competition tends to equalize the home and foreign prices of traded goods and services. |
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Definition
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Term
True or False
Economic models have been very effective in predicting exchange rates. |
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Definition
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Term
True or False
Real exchange rates can be used as an indicator of deviations from purchasing power parity or as an indicator of a country's international price competitiveness.
Real exchange rates can be used as an indicator of deviations from purchasing power parity or as an indicator of a country's international price competitiveness. |
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Definition
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