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Exchange Rates & Currency Changes Flashcards

Exchange Rates & Currency Changes Flashcards
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Flexible Exchange Rate

Supply and demand guide this exchange rate. It is affected by inflation, interest rates, political stability and other factors.

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Fixed Exchange Rate

The government controls this exchange rate. It is sometimes called a pegged rate.

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Conversion Rate

Determine this by dividing the amount of currency you want to convert by the amount of currency you would like to convert into.

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Forward Exchange Rate

Your company can lock into this exchange rate to be used at a future date, regardless of what the actual exchange rate is at that time.

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Long-Run Exchange Exposure

You face this kind of risk over a lengthy period of time. It deals with the way exchange rates can become unfavorable as time passes.

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Short-Run Exchange Exposure

This risk occurs when companies may need to deal with exchange rates that are unfavorable around the current time.

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Translation Exposure

Companies face this risk when they invest in currency from another country and have to report stock prices with an unfavorable exchange rate.

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Currency Depreciation

This happens when a country's currency weakens and loses value in relation to other countries' currencies. This increases inflation and may lead to a trade surplus.

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Currency Appreciation

The process that occurs when one country's currency grows more valuable relative to the currency of another country. This lowers inflation and may create a trade deficit.

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19 cards in set

Flashcard Content Overview

The flashcards in this set can help you review currency appreciation and depreciation. You can focus on exchange rates and the risks associated with it. Both fiscal and monetary policies will be covered by these cards. You'll also be able to focus on the Big Mac index along with relative and absolute purchase price parity (PPP).

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Back
Currency Appreciation

The process that occurs when one country's currency grows more valuable relative to the currency of another country. This lowers inflation and may create a trade deficit.

Currency Depreciation

This happens when a country's currency weakens and loses value in relation to other countries' currencies. This increases inflation and may lead to a trade surplus.

Translation Exposure

Companies face this risk when they invest in currency from another country and have to report stock prices with an unfavorable exchange rate.

Short-Run Exchange Exposure

This risk occurs when companies may need to deal with exchange rates that are unfavorable around the current time.

Long-Run Exchange Exposure

You face this kind of risk over a lengthy period of time. It deals with the way exchange rates can become unfavorable as time passes.

Forward Exchange Rate

Your company can lock into this exchange rate to be used at a future date, regardless of what the actual exchange rate is at that time.

Conversion Rate

Determine this by dividing the amount of currency you want to convert by the amount of currency you would like to convert into.

Fixed Exchange Rate

The government controls this exchange rate. It is sometimes called a pegged rate.

Flexible Exchange Rate

Supply and demand guide this exchange rate. It is affected by inflation, interest rates, political stability and other factors.

Partially Flexible Exchange Rate

This exchange rate is largely regulated by supply and demand, but the government also influences it to a certain extent.

Currency Appreciation: Effect on Trade

This process can increase the number of imports brought into a country because they will be cheaper. However, exports decrease because they will be more expensive.

Fiscal Policy

Policies used by the government to influence the economy. These usually include changes to taxes or government spending. For example, increasing tax returns can stimulate the economy.

Monetary Policy

The kind of policy focused on credit and money supply. The Federal Reserve is in charge of this.

Purchasing-Power Parity (PPP): Formula

Price of a good in country 1 / price of a good in country 2

Purchasing-Power Parity (PPP)

This occurs when the currencies of two countries have the same purchasing power. If this is lower than the exchange rate, the currency is overvalued.

Find the cost of a milkshake in country B if it costs $2 in country A and the purchasing-parity index is 0.90.

Divide the cost of country A's milkshake by the purchasing-parity index. 2 / .90 = $2.22.

Big Max Index

This looks at whether or not you can purchase a specific kind of hamburger for the same cost using two different currencies. It assesses purchasing power parity in this way.

Relative Purchase Price Parity

The price level that focuses on interest rates along with the way currencies appreciate due to exchange rate differences. This is dynamic compared to other levels.

Absolute Purchase Price Parity

The kind of purchase price parity that balances the prices different countries change for goods or services. It is not as dynamic as other types of this kind of parity.

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