Foreign Exchange

These flashcards cover key concepts related to foreign exchange rates, currency risk, and international monetary systems, providing essential information for exam preparation.

What is a foreign exchange rate?

The price of one currency in terms of another.

What does appreciation of a currency mean?

An increase in the value of the currency.

What does depreciation of a currency refer to?

A loss in the value of the currency.

What is the Big Mac Index?

An indicator used to measure purchasing power parity (PPP) across countries using the price of a Big Mac.

How do high interest rates affect currency demand?

High interest rates attract foreign funds and increase demand for the home country's currency.

What can cause a currency to depreciate?

A government printing money when facing a short money supply can lead to inflation and currency depreciation.

What is meant by productivity in relation to foreign direct investment (FDI)?

Increased productivity can attract more FDI, fueling demand for the home currency.

What is a floating exchange rate policy?

A policy that allows supply and demand conditions to determine exchange rates without government intervention.

What is the difference between a clean float and a dirty float?

A clean float is a pure market solution for exchange rates, while a dirty float involves selective government intervention.

What is the Bretton Woods system?

A system in which all currencies were pegged at a fixed rate to the US dollar from 1944 to 1973.

What role does the International Monetary Fund (IMF) play?

The IMF promotes international monetary cooperation and provides loans to countries with balance-of-payments problems.

What is currency risk?

The potential for loss associated with fluctuations in the foreign exchange market.

What is the difference between a spot transaction and a forward transaction?

A spot transaction is an immediate exchange of currencies, while a forward transaction involves a currency exchange at a future date.

What is currency hedging?

A transaction that protects traders and investors from exposure to fluctuations in the spot rate.

What is the spread in currency trading?

The difference between the offer rate and the bid rate.

What are the three primary strategies nonfinancial companies use to cope with currency risk?

Invoicing in their own currencies, currency hedging, and strategic hedging.

What does strategic hedging involve?

Spreading activities across different countries and currency zones to offset losses in one region with gains in another.