Government Influence on Exchange Rates
The complete elimination of exchange rate risk on transactions between participating European countries, which encourages more trade and capital flows within Europe
What is a major advantage of the euro?
Taking advantage of a difference in prices either in geography or through time
What is arbitrage?
The same good in different competitive markets must sell for the same price
What is the law of one price?
1 + i = (1 + R) × (1 + I)
What is the mathematical expression of the Fisher Effect?
Geographic arbitrage consist of
What is locational arbitrage and triangular arbitrage?
The determinant of exchange rates in a freely floating exchange rate system
What are market forces?
When the forward rate differs from the spot rate by a sufficient amount to offset the interest rate differential between two currencies
What is Interest Rate Parity equilibrium?
Eh/f = Ph / Pf
What is the mathematical expression of Absolute PPP?
According to IFE, if Venezuela has a much higher nominal rate than other countries, its inflation rate will likely be ____ than other countries, and its currency will ____.
What is higher and weaken?
This graph is an example of
What is direct intervention by the Fed exchanging US dollars for British pounds?
Low unemployment and high inflation in the US
What are causes normally expected from a weak dollar?
p = (1+ih) / (1+if) - 1
What is the Interest Rate Parity formula for the Forward Premium?
ef = (1+Ih) / (1+If) - 1
What is the mathematical expression of Relative PPP?
ef = (1+ih) / (1+if) - 1
What is the mathematical expression of the International Fisher Effect?
PPP theory suggests that the equilibrium exchange rate will adjust by approximately the same magnitude as
What is the difference between the two countries’ inflation rates?
When the Fed conducts foreign exchange operations and simultaneously engages in quantitative tightening or quantitative easing
What is sterilized intervention?
The difference in profit from a covered interest arbitrage when investing $1,000,000 in the foreign money market versus the US money market given the following inputs:
Spot rate of ₹: $0.80/₹1
90-day forward rate of ₹: $0.81/₹1
90-day foreign interest rate: 2%
90-day US interest rate: 3%
What is $2,750?
The expected inflation in Europe over the past year based on relative PPP given the following information:
Exchange rate 1 year ago: £1.30/€1
Exchange rate today: £1.28/€1
Inflation in Great Britain was 7% over the past year
What is a 8.67%?
There is no arbitrage opportunity
What is, "If IFE holds"?
The international Fisher effect (IFE) specifies a precise relationship between
What is relative interest rates of two countries and their exchange rates?
The Fed changes the interest rate on US deposits
What is an example of Indirect Intervention?
The profit from an arbitrage given $1,000,000 and the following inputs:
Alpha Bank Bravo Bank
Bid $0.401/₺1 $0.398/₺1
Ask $0.404/₺1 $0.400/₺1
What is $25,000?
The expected change in the Korean won (₩) over the next year based on the spot and forward rates given the following information:
Spot rate ₩1,335/$1
1-year forward rate ₩1,320/$1
What is a 1.14% appreciation of the Korean won?
The expected change in the Swiss franc (₣) over the next year given the following information:
US Swiss
1-year interest rate 12.2% 13.5%
What is a 1.15% depreciation of the Swiss franc?
The expected change in the Korean won (₩) over the next year based on the differential in expected inflation given the following information:
US Korea
Real interest rate 3% 3%
Nominal rate 11.3% 9.5%
What is a 1.64% appreciation of the Korean won?