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Global economics WGU
Dealing with foreign Exchange chapter 7
| Question | Answer |
|---|---|
| determinants of foreign exchange | supply & demand and how do firms respond to exchange movements |
| supply and demand factors | relative price differences and PPP, interest rates and money supply, productivity & balance of payments, exchange rate policies, investor psychology |
| primary strategies to respond to foreign exchange movements | currency and strategic hedging |
| balance of payments | a countries international transaction statement which includes merchandise trade, service trades, a capital movement |
| current account balance | balance of trade + net factor income from abroad + net unilateral transfers from abroad |
| floating or flexible (exchange rate policy) | willingness of government to let demand & supply conditions determine exchange rates - market forces dictate |
| clean or free (exchange rate policy) | pure market solution to determine exchange rates |
| dirty or managed (exchange rate policy) | using selective government intervention to determine exchange rates - market vs. government |
| target exchange rates (crawling bands) | specified upper or lower bands within which an exchange rate is allowed to fluctuate |
| fixed rate policy | setting the exchange rate of a currency relative to other currencies |
| peg | stabilizing policy of linking a developing country's currency to a key currency |
| investor psychology | bandwagon effect and capitol flight |
| bandwagon effect | effect of investors moving in the same direction at the same time |
| capitol flight | phenomenon in which a large number of individuals and companies exchange domestic currencies for a foreign currency |
| spot transaction | classic single shot exchange of one currency for another |
| forward transaction | foreign exchange transaction in which participants by and sell currencies now for future delivery |
| currency hedging | transaction that protects traders & investors from exposure to the fluctuations of the spot trade |
| forward discount | condition UNDER WHICH THE FORWARD RATE of one currency relative to another currency is higher than the spot rate |
| forward premium | condition under which the forward rate of one currency relative to another currency is lower than the spot rate |
| currency swap | foreign exchange transaction between 2 firms in which 1 currency is converted into another at time 1 with an agreement to revert it back to the original currency at a specified time 2 in the future |
| offer rate | price at which a bank is willing to sell a currency |
| bid rate | price at which a bank is willing to buy a currency |
| spread | difference between the offer price and bid price |
| currency risk | potential for loss associated w/ fluctuations in the foreign exchange market |
| strategic hedging | spreading out activities in a number of countries in different currency zones to offset any currency losses in one region through gains in other regions |
| IMF (international monetary fund) | an international organization established to promote international monetary cooperation exchange stability & orderly exchange arragnements |
| US consumers benefit from low prices on imports | advantage of strong $ |
| lower prices on foreign goods help US price level & inflation level low | advantage of strong $ |
| US tourists enjoy lower prices abroad | advantage of strong $ |
| US firms find it easier to acquire foreign targets | advantage of strong $ |
| US exporters find it easier to compete on price abroad | advantage of weak $ |
| US firms face less competitive pressure to keep prices low | advantage of weak $ |
| foreign firms find it easier to acquire US targets | advantage of weak $ |
| The US can print more dollars to export its problems to the rest of the world | advantage of weak $ |
| US exporters have a hard time competing on price abroad | disadvantage of strong $ |
| US firms in import competing industries have a hard time competing w/ low cost imports | disadvantage of strong $ |
| foreign tourists find it more expensive when visiting the US | disadvantage of strong $ |
| US consumers face higher prices on import | disadvantage of weak $ |
| higher prices on imports contribute to higher price level & inflation level in the US | disadvantage of weak $ |
| US tourists find it more expensive when traveling abroad | disadvantage of weak $ |
| governments, firms, & individuals outside the US holding dollar denominated assets suffer from valuing loss of their assets | disadvantage of weak $ |
Created by:
nashanta
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