Podcast
Questions and Answers
What is the spot exchange rate if €1 = $1, and the importer must pay €100,000?
What is the spot exchange rate if €1 = $1, and the importer must pay €100,000?
- $90,909 (correct)
- $120,000
- $83,333
- $100,000
How can an importer reduce exchange risk in a situation where the dollar is expected to depreciate?
How can an importer reduce exchange risk in a situation where the dollar is expected to depreciate?
- By accepting the risk without any action
- By increasing the quantity of goods imported
- By purchasing a forward contract (correct)
- By delaying payment to the supplier
What does a 90-day forward contract allow the importer to do?
What does a 90-day forward contract allow the importer to do?
- Sell euros in the foreign exchange market
- Wait 90 days before making any payment
- Exchange euros for dollars immediately
- Buy euros at a predetermined rate in 90 days (correct)
If the forward exchange rate is €1.2 = $1, what is the cost in dollars to buy €100,000 through the forward contract?
If the forward exchange rate is €1.2 = $1, what is the cost in dollars to buy €100,000 through the forward contract?
According to the general rule mentioned, which currency typically trades at a forward premium?
According to the general rule mentioned, which currency typically trades at a forward premium?
What is an effective exchange rate designed to account for?
What is an effective exchange rate designed to account for?
In the context of real exchange rates, what do they cover differences between?
In the context of real exchange rates, what do they cover differences between?
How does a forward contract help an importer manage foreign exchange risk?
How does a forward contract help an importer manage foreign exchange risk?
Why do currencies with higher interest rates typically trade at a forward discount?
Why do currencies with higher interest rates typically trade at a forward discount?
How does an effective exchange rate differ from a nominal exchange rate?
How does an effective exchange rate differ from a nominal exchange rate?
Flashcards
Spot Exchange Rate Example
Spot Exchange Rate Example
The immediate exchange rate; in this case, €100,000 costs $90,909 at a spot rate of €1 = $1.
Forward Contract
Forward Contract
Reduces risk by locking in an exchange rate for future transactions.
90-Day Forward Contract
90-Day Forward Contract
It allows the importer to purchase euros at a set exchange rate, regardless of future exchange rate fluctuations.
Forward Contract Cost
Forward Contract Cost
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Forward Premium Rule
Forward Premium Rule
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Effective Exchange Rate
Effective Exchange Rate
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Real Exchange Rates
Real Exchange Rates
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Forward Contract Benefit
Forward Contract Benefit
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Currencies with higher interest rates
Currencies with higher interest rates
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Effective vs. Nominal Exchange Rate
Effective vs. Nominal Exchange Rate
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Study Notes
Foreign Exchange Market
- The foreign exchange market is where different national currencies are bought and sold.
- Actors in the foreign exchange market include commercial banks, corporations, non-bank financial institutions, and the central bank.
Exchange Rate
- The exchange rate is the price of one currency in terms of another.
- Exchange rates are crucial in an open economy, influencing the current account and macroeconomic variables.
Exchange Rates (Examples)
- PHP exchange rates as of February 21, 2023 and 2024, with rates for USD, JPY, GBP, BHD, and EUR.
Real Exchange Rate
- The real exchange rate (R) is calculated as: R = e × (P(home) / P(foreign)), where e is the bilateral or effective exchange rate.
- A rise in the real exchange rate indicates a real appreciation, while a fall indicates a real depreciation.
Demand and Supply of Foreign Exchange
- The exchange rate is the price, with demand and supply influencing the market.
- Demand refers to the quantity of a currency demanded, while supply refers to the quantity supplied.
Demand and Supply Factors
- Factors influencing demand and supply include relative national income, interest rates, and inflation rates.
Exchange Rate Determination
- Forces influencing the demand and supply of a currency include relative national income, interest rates, and inflation rates.
Forward Exchange Rates
- A forward exchange rate is the price of a currency at a future date.
- Forward contracts can be used to reduce exchange risk, such as in the case of an American importer of European goods.
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