unit 9 IB test 2

capital flight occurs when

the value of domestic currency is rapidly depreciating

currency swap

to move one currency to another without incurring foreign exchange risk

If the exchange rate is 1 British pound to $1.35, an American in London will need ______ to purchase a purse priced at 20 pounds.

$27

forward exchange

2 parties agree to exchange currency at a specific date in the future

An American tourist in Japan is interested in buying a souvenir that costs 1800 yen. How much is this in dollars if the exchange rate is $1 to Y400.

4.50

carry trade

Borrowing in a currency from a country with low interest rates and then investing in another currency where interest rates are high

efficient market school

believes market is effecting at setting forward rates

Tyson is a trader and borrows money in Japanese yen (where the interest rate is 1%). He then invests the money in a Canadian bank, where the rate is 5%. This is an example of a(n) ______.

carry trade

foreign exchange market can be used to

convert currency

A foreign exchange market is where one country's ______ is converted into that of another country.

currency

2 main functions or foreign exchange market

currency conversion,provide insurance against foreign exchange rate

efficient market prices reflect

fully reflect all availible information

two schools of thought regarding prediction of future exchange rates

inefficient market school,efficient market school

a business is using hedging when it

insures itself against foreign exchange risk.

currency conversion

investment made to profit from future currency movements

most important trading center is

london at 37% activity

fundamental approach

method in which that draws economic theory to construct sophisticated models

externally convertible

only non residents can convert foreiign exchange currency without limits

spot exchange rate

price to exchange one currency for another for immediate delivery,most common currency swap

What are the two main functions of the foreign exchange market?

provide insurance against foreign exchange risk,currency conversion

The adverse consequences of unpredictable changes in exchange rates is called foreign exchange

risk

Currency ______ involves buying, selling and holding currencies in order to make a profit from favorable fluctuations in exchange rates. made to profit from future currency movements

speculation

freely convertible

the currency governments have when they dont put limits on foreign exchange currency for residents and non residents

risk

The adverse consequences of unpredictable changes in exchange rates is called foreign exchange