Exchange Rate Arrangements and Influences

Interest rate risk and exchange rate risk are two key risks.

Political risk can lead to government actions like expropriation or changing tax laws, reducing bond value.

Political risk can be measured using subjective and economic factors.

<p>One strategy is to seek political risk insurance.</p> Signup and view all the answers

<p>An ADR allows investors to trade foreign company shares on domestic exchanges.</p> Signup and view all the answers

<p>Geographic diversification spreads investments across different regions, reducing exposure to specific local risks.</p> Signup and view all the answers

<p>Currently, exchange rate arrangements are hybrid with major currencies floating on a managed basis, while others are pegged. The future may see more currencies floating with other currencies pegged in some form.</p> Signup and view all the answers

<p>International mutual funds offer diversified exposure and professional management.</p> Signup and view all the answers

<p>Borderless investing allows access to a wider array of investment opportunities globally.</p> Signup and view all the answers

<p>Some fundamental factors include country size (GDP), degree of openness, trade concentration, inflation differential with trading partners, and types of economic shocks faced.</p> Signup and view all the answers

<p>A global currency may not be viable because it would require countries to relinquish control over their monetary policies, limiting their ability to adjust interest rates and money supply based on local conditions.</p> Signup and view all the answers

<p>The U.S. dollar would depreciate and weaken as higher foreign interest rates attract investors, prompting them to sell dollars for foreign currencies.</p> Signup and view all the answers

<p>The model includes components for the money supply growth, real GDP growth, and the difference in short-term real interest rates, reflecting their impact on the percentage change in the spot exchange rate.</p> Signup and view all the answers

<p>No, the model does not face a stationarity problem as all variables are expressed in percentage terms, suitable for calculating the spot exchange rate.</p> Signup and view all the answers

<p>Trade concentration influences exchange rate arrangements by affecting how vulnerable a country's economy is to external shocks and the need for stable currency values.</p> Signup and view all the answers

<p>Inflation differentials can lead a country to adopt a certain exchange rate policy to maintain competitiveness and prevent currency devaluation against more stable trading partners.</p> Signup and view all the answers

<p>The A$ appreciates by approximately 6.1%. It takes less Australian dollars to buy one United States Dollar.</p> Signup and view all the answers

<p>Inflation rate and political factors. These variables impact currency stability and can influence exchange rate fluctuations.</p> Signup and view all the answers

<p>The PPP deviation is approximately 3.6%. It reflects the change in relative purchasing power based on CPI differences.</p> Signup and view all the answers

<p>An increasing money supply leads to increased inflation, causing the Euro to depreciate compared to the Yen.</p> Signup and view all the answers

<p>Increased wages lead to higher consumer income and consumption. This can stimulate economic growth.</p> Signup and view all the answers

<p>The formula is ((0.0002 - 0.0213) / (1 + 0.0213)) = ((F-137) / 137).</p> Signup and view all the answers

<p>Changes in the current account balance indicate pressures on the exchange rate. A surplus might strengthen the currency, while a deficit might weaken it.</p> Signup and view all the answers

<p>Historical exchange rates help establish patterns that can inform predictions of future currency behavior.</p> Signup and view all the answers

<p>Foreign exchange risk arises when cash flows are in a foreign currency, leading to uncertainty when converted to the domestic currency. Firms can mitigate this risk by using forward or futures contracts.</p> Signup and view all the answers

<p>Political risk refers to uncertainty regarding property rights due to government actions, such as nationalization or regulatory changes. For example, a sudden change in trade policies could diminish the value of foreign investments.</p> Signup and view all the answers

<p>A domestic firm may face foreign exchange risks when it engages in activities like importing goods, exporting products, or outsourcing operations to foreign countries. Such transactions expose them to currency value fluctuations.</p> Signup and view all the answers

<p>Firms engage in FDI to access key resources, expand into new markets, and enhance operational efficiency. This can include securing low-cost labor or acquiring new technologies.</p> Signup and view all the answers

<p>The ICAPM model differs by focusing on global market risk rather than domestic market risk and incorporating additional risk premiums linked to currency sensitivity. This results in different expected returns for individual securities.</p> Signup and view all the answers

<p>Firms can manage foreign political risks through strategies like avoidance, obtaining risk insurance, and building local relationships. These approaches help stabilize their operations in politically volatile environments.</p> Signup and view all the answers

<p>Currency exposures are measurements of how sensitive an asset's returns are to changes in exchange rates. They are significant as they affect expected returns, especially for assets held in foreign currencies.</p> Signup and view all the answers

<p>Risk premiums compensate investors for taking on additional risks associated with global investments, such as currency fluctuations and political uncertainties. They play a key role in determining an asset's expected return.</p> Signup and view all the answers

<p>Social capital refers to the value derived from trust, relationships, and community. It is important as it reduces transaction costs, encourages investment, and fosters cooperation.</p> Signup and view all the answers

<p>High social capital can attract FDI by creating an environment of trust and stability, which encourages investors to engage in risky ventures.</p> Signup and view all the answers

<p>Bitcoin's price is influenced by supply, speculative demand, and market acceptance rather than being tied to any specific economy or government regulation.</p> Signup and view all the answers

<p>Investment in Bitcoin carries risks such as high volatility, potential for hacking, and the absence of interest rates.</p> Signup and view all the answers

<p>Social capital can foster trust and cooperation among community members, which contributes to a stable political environment.</p> Signup and view all the answers

<p>In competitive industries, profit margins are tight, making financial metrics and operational efficiency more critical than social relationships.</p> Signup and view all the answers

<p>Bitcoin offers transparency, security, and the potential for lower transaction fees in cross-border exchanges.</p> Signup and view all the answers

<p>Trust is a vital component in financial industries, making high social capital crucial for reducing enforcement costs and promoting investment.</p> Signup and view all the answers

<p>Expected Spot Rate = Current Spot Rate x [(1+inflation SA)/(1+ inflation US)]^n</p> Signup and view all the answers

<p>Expected Spot Rate = 0.146 USD/ZAR</p> Signup and view all the answers

<p>High interest rates in Turkey are likely driven by inflation, political instability, economic uncertainty, and expectations of currency depreciation.</p> Signup and view all the answers

<p>The Turkish lira would depreciate by approximately 64.17% compared to the U.S. dollar.</p> Signup and view all the answers

<p>$11,500</p> Signup and view all the answers

<p>12,205.19 euros</p> Signup and view all the answers

<p>The total return is 22.05%.</p> Signup and view all the answers

<p>955.19 euros was due to exchange rate movement.</p> Signup and view all the answers

A mix of managed floating for major currencies and various pegged arrangements for others.

A shift towards flexible exchange rates with a set of floating currencies and others pegged.

Country size (GDP), openness, trade concentration, and inflation differentials between a country and major trading partners affect the choice of exchange rate system.

A global currency like GLOBALL might not be viable because it requires countries to give up control over monetary policies.

Higher foreign interest rates weaken the US Dollar as investors seek higher returns elsewhere.

A model using growth rates (percentage change) for money supply, GDP, and interest rates avoids stationarity issues in the exchange rate calculation.

Variables in the model include exchange rate change, money supply growth, GDP growth, and real interest rate.

Australian exchange rate model (S) is a function of money supply, GDP, and real interest rate differences.

An exchange rate that, over the long term, tends to return to a mean value.

A decrease in the value of the Australian dollar relative to the US dollar.

A reduction in the money supply typically increases short-term interest rates and can lower the inflation rate without impacting economic growth.

The theory stating that exchange rates should adjust to equalize the purchasing power of different currencies.

Exchange rates are influenced by inflation rates, current account balances, political factors, foreign exchange reserves, and historical exchange rate patterns.

An increasing money supply often leads to higher inflation, which in turn can cause a currency to depreciate.

Rising wages can increase consumption, potentially affecting the exchange rate, though the relationship isn't direct.

The predicted exchange rate between two currencies at a future date, often based on interest rates.

Government actions (e.g., expropriation, tax changes) that affect investment value.

Assessing political risk using factors like political, economic, subjective, and micro factors.

Strategies like avoidance, insurance, or local tie-ins to mitigate political risk.

Strategies like geographic diversification, joint ventures, or insurance to reduce investment risk.

Investing in foreign stocks, potentially through instruments like ADRs or international mutual funds.

Trading instruments that allow investors to buy and sell foreign company shares on a domestic exchange.

Risk in foreign investments due to fluctuations in foreign currency values.

Risk in foreign investments due to changes in interest rates in the issuing country.

Uncertainty in the value of cash flows denominated in a foreign currency when converted back to the home currency.

Uncertainty about property rights due to government actions (nationalization, regulations, trade restrictions) that impact investment value.

International Capital Asset Pricing Model. It extends the CAPM by considering global market risk and currency movements.

The difference between the expected return on the world market portfolio and the domestic risk-free rate.

Investment in a foreign country to gain access to resources, expand markets, or improve operational efficiency.

Foreign direct investment motivated by acquiring cost-effective labor, raw materials, or technology in a foreign country.

Foreign direct investment driven by bypassing trade barriers and better catering to local consumer preferences.

Sensitivity of an asset's return to changes in exchange rates.

The value added by trust, relationships, and community within a society.

Reduces transaction costs, encourages investment, and fosters cooperation, especially in sectors with strong trust requirements like banking.

Driven by fixed supply, speculative demand, and market acceptance, making it highly volatile; not directly tied to any specific economy or government.

Traditional exchange rate analyses are less relevant for understanding Bitcoin's price fluctuations.

Bitcoin offers transparency and security, but it lacks interest rates and is vulnerable to risks like hacking, making it high-risk, but potentially useful for diversification in emerging markets, especially for long-term investors.

Ireland has become a strategic location for companies maintaining EU operations post-Brexit and attracting private equity firms due to strong investor protections and favorable investment climate.

Social capital is relevant, but may be less significant in highly competitive industries with tight margins, where trust may be less crucial.

High social capital can lead to political stability, economic freedom, and attract foreign direct investment.

Calculates the future exchange rate using current spot rate, inflation rates of the two countries, and the time period.

Higher inflation in a country tends to depreciate its currency, as its purchasing power weakens relative to other currencies.

High inflation, political instability, economic uncertainty, and expectations of currency depreciation lead to high interest rates in Turkey.

Predicts that the exchange rate will adjust to offset the interest rate differential between two countries.

Calculate the total return on an investment by considering both the capital gains from the investment and the exchange rate fluctuations.

An investor's return is measured in their base currency, taking into account both the investment gains and exchange rate movements.

Fluctuations in the exchange rate between the investor's base currency and the investment currency can significantly impact the overall return.

When the exchange rate becomes more favorable, the investor's return can be amplified, even if the initial investment itself was not very profitable.