Understanding the Dynamics of FOREX Markets
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Understanding the Dynamics of FOREX Markets

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Questions and Answers

What makes the FOREX market?

  • Trading stocks and bonds
  • Trading currencies and bank deposits (correct)
  • Trading real estate and precious metals
  • Trading commodities and options

    • What are spot transactions in the FOREX market?

  • Trading commodities at current market price
  • Exchanges at some future date completed at forward rate
  • Near-immediate exchange of bank deposits at spot rates (correct)
  • Buying and selling stocks at the current market price

    • What are forward transactions in the FOREX market?

  • Exchanges at some future date completed at forward rate (correct)
  • Trading commodities at current market price
  • Buying and selling stocks at the current market price
  • Near-immediate exchange of bank deposits at spot rates

    • Why are exchange rates important?

    <p>They affect the competitiveness of domestic goods in foreign markets</p> Signup and view all the answers

    $f(x) = (1.23-1.18)/1.18$ represents:

    <p>$f(x)$ for calculating percentage appreciation of euro</p> Signup and view all the answers

    $f(x) = (0.812-0.847)/0.847$ represents:

    <p>$f(x)$ for calculating percentage depreciation of dollar</p> Signup and view all the answers

    According to the Law of One Price (LOOP), what happens if the price of an identical good is not the same throughout the world?

    <p>Arbitrage opportunities arise and people work to equalize the prices</p> Signup and view all the answers

    What does the Theory of Purchasing Power Party (PPP) suggest will happen if a country's domestic price level increases?

    <p>The domestic currency will depreciate</p> Signup and view all the answers

    What are some of the problems with the Theory of Purchasing Power Party (PPP)?

    <p>All goods are not identical in both nations and many goods and services are not traded</p> Signup and view all the answers

    According to the Big Mac Index, what should be true if the Law of One Price (LOOP) applies?

    <p>Big Macs should cost the same worldwide and can be used to calculate exchange rates</p> Signup and view all the answers

    What factors affect exchange rates in the long run according to the text?

    <p>Relative price levels, Tariffs and quotas, Preferences for domestic vs foreign goods, Productivity</p> Signup and view all the answers

    How do interest rate changes affect exchange rates according to the text?

    <p>When domestic real interest rate increases, domestic currency appreciates</p> Signup and view all the answers

    What was a significant event related to the Subprime Crisis and the Dollar according to the text?

    <p>Flight to quality T-bonds led to a sudden increase in dollar value by end of October 2008</p> Signup and view all the answers

    What happens when there is a rise in price level according to exchange rate determination?

    <p>Currency depreciates</p> Signup and view all the answers

    What does an increase in demand for domestic goods relative to foreign goods cause according to exchange rate determination?

    <p>Exchange rate goes up</p> Signup and view all the answers

    How do tariffs and quotas affect exchange rates according to the text?

    <p>Increasing trade barriers cause currency to depreciate</p> Signup and view all the answers

    What does The Economist's Big Mac Index aim to show?

    <p>Under/overvaluation of currencies based on Big Mac prices worldwide</p> Signup and view all the answers

    According to the Law of One Price (LOOP), if the price of an identical good is not the same throughout the world, what will happen?

    <p>Arbitrage opportunities will exist and people will take advantage of them to equalize the prices</p> Signup and view all the answers

    What does an increase in domestic real interest rate lead to, according to exchange rate determination?

    <p>Appreciation of the domestic currency</p> Signup and view all the answers

    What does a rise in price level cause according to exchange rate determination?

    <p>Depreciation of the currency</p> Signup and view all the answers

    What is one of the factors affecting exchange rates in the long run according to the text?

    <p>$Relative$ $price$ $levels$</p> Signup and view all the answers

    $f(x) = (0.812-0.847)/0.847$ represents:

    <p>$-0.0412$</p> Signup and view all the answers

    $f(x) = (1.23-1.18)/1.18$ represents:

    <p>$0.0424$</p> Signup and view all the answers

    What does the FOREX market primarily involve?

    <p>Trading currencies and bank deposits</p> Signup and view all the answers

    What is the primary purpose of forward transactions in the FOREX market?

    <p>Exchanging at a future date to mitigate exchange risk</p> Signup and view all the answers

    Why are exchange rates important in the context of international trade?

    <p>They impact the competitiveness of domestic goods in foreign markets</p> Signup and view all the answers

    $f(x) = (0.812-0.847)/0.847$ represents:

    <p>$f(x)$ is the percentage change in the value of the dollar from 1999 to 2010</p> Signup and view all the answers

    $f(x) = (1.23-1.18)/1.18$ represents:

    <p>$f(x)$ calculates the percentage change in the value of a specific currency from 1999 to 2010</p> Signup and view all the answers

    What happens when a country's currency appreciates?

    <p>Domestic goods become more expensive for foreign buyers</p> Signup and view all the answers

    What impact does volatility have on the FOREX market?

    <p>It increases uncertainty and risk in currency trading</p> Signup and view all the answers

    What does an increase in demand for domestic goods relative to foreign goods cause according to exchange rate determination?

    <p>It leads to an appreciation of the domestic currency</p> Signup and view all the answers

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