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Questions and Answers
Exchange Rate is also termed as the ______ rate, forex rate or FX rate.
foreign exchange
The Foreign Exchange Market is the market in which ______ rates are determined.
exchange
When a currency increases in value, it experiences ______.
appreciation
When a currency falls in value and is worth fewer dollars, it undergoes ______.
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Foreign exchange rates are basically determined by the law of ______ and demand.
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If a central bank has no sufficient ______ reserves, it imposes controls on demand.
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Using the exchange rate, we are able to compare prices of goods, services, and assets quoted in different ______.
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A peso appreciation reduces the amount of pesos needed to buy foreign exchange to pay ______ and maturing obligations.
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Spot Transactions involve the immediate exchange of bank deposits denominated in different ______.
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Forward Transactions involve the exchange of bank deposits denominated in different currencies at some specified ______ date.
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The exchange rate for a spot transaction is known as the ______ Exchange Rate.
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A change in the exchange rate under a fixed rate system is effected through an official announcement by the ______ bank.
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A Free floating rate with official intervention is known as the ______ float.
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Under an adjustable pegged rate, the rate is fixed by the monetary ______.
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In a Free Floating Rate System, the price of the dollar relative to the peso is determined by the free market forces of ______ and supply.
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Foreign Exchange Dealers make profit out of the difference between the ______ and selling.
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Study Notes
Foreign Exchange Market
- The foreign exchange market is a platform where currencies and bank deposits in specific currencies are traded.
- It determines exchange rates.
Concept of Foreign Exchange Rate
- Exchange rate is the price of one currency in terms of another.
- Appreciation occurs when a currency increases in value.
- Depreciation occurs when a currency falls in value and is worth fewer units of another currency.
Impact of Foreign Exchange Rates on Daily Life and the Economy
- When the Philippine Peso appreciates, foreign goods become cheaper for Filipinos, and Philippine goods become more expensive for foreigners.
- When the Philippine Peso depreciates, foreign goods become more expensive for Filipinos, and Philippine goods become cheaper for foreigners.
- Foreign exchange rates are determined by the law of supply and demand.
- If a central bank has insufficient international reserves, it may impose controls on demand, such as import controls, to prevent devaluation of the peso.
Importance of Foreign Exchange Rate
- Affects the relative price of domestic and foreign goods.
- Serves as the link between the local and overseas markets for goods, services, and financial assets.
- Enables comparison of prices quoted in different currencies.
- Affects the cost of servicing foreign debt, with appreciation reducing the amount of pesos needed to pay interest and maturing obligations.
Kinds of FOREX Rate Transactions
- Spot transactions involve the immediate exchange of bank deposits in different currencies.
- Forward transactions involve the exchange of bank deposits in different currencies at a specified future date.
- Spot exchange rate is the rate for a spot transaction.
- Forward exchange rate is the rate for a forward transaction.
Changes in Exchange Rates
- In a floating exchange rate system, if dollar demand exceeds supply, the price of the dollar in terms of the peso increases.
- In a floating exchange rate system, if dollar supply exceeds demand, the value of the dollar in terms of the peso decreases.
- In a fixed rate system, changes in the exchange rate are made through official announcements by the central bank.
Floating/Flexible Exchange Rate System
- A system where the price of the dollar relative to the peso is determined by market forces of demand and supply.
- This is the current foreign exchange rate policy in the country.
Types of Exchange Rates based on Monetary Policies
- Adjustable pegged rate is fixed by monetary authorities, regardless of market demand and supply conditions.
- The IMF may impose a fixed rate to correct balance of payments disequilibrium.
- Free floating rate without official interventions is determined by market demand and supply conditions.
- Free floating rate with official intervention, also known as the "dirty float", allows the rate to fluctuate based on market conditions, but with government intervention in cases of extreme fluctuations.
Participants in the Foreign Exchange Market
- Foreign Exchange Dealers buy and sell foreign exchange to make a profit from the difference between buying and selling prices.
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Description
Learn about the foreign exchange market, where currencies and bank deposits are traded, and understand the concept of exchange rates, including appreciation and depreciation.
