4 Exchange Rates and Currency Risk Free Online FlashCards

What is an exchange rate?

An exchange rate is the price of one currency expressed in terms of another.

How does a fixed or pegged exchange rate work?

A government or central bank maintains the currency at a target value, or within a narrow range, against another currency or a basket of currencies.

How do free and managed floats differ?

A free float involves little intervention, while authorities in a managed float may buy or sell currencies to influence movements without maintaining a fixed target.

If a quote rises from $1.10 to $1.20 per euro, what happens to each currency?

The euro has appreciated against the dollar, and the dollar has depreciated against the euro.

How can a stronger domestic currency affect imports and exports?

All else equal, foreign goods and services become less expensive for domestic buyers, while domestic exports may become more expensive to overseas customers.

What is transaction exposure?

Transaction exposure is the risk that exchange-rate changes alter the domestic-currency value of a foreign-currency payment or receipt due in the future.

What creates translation exposure?

Translation exposure arises when a company's foreign subsidiaries' financial statements are converted into the parent company's reporting currency.

What is economic exposure to exchange rates?

Economic exposure is the longer-term effect of exchange rates on a firm's costs, prices, competitiveness, sales, and value.

What is the role of the foreign-exchange market?

The foreign-exchange market enables businesses, banks, investors, governments, and others to exchange currencies; trading is largely over the counter.

What is a spot transaction?

A spot transaction exchanges currencies at an agreed rate for near-term settlement.

How does a foreign-exchange forward work?

A forward contract sets today the rate for exchanging specified amounts of two currencies on a future date.

What happens in an FX swap?

An FX swap exchanges currencies now and reverses the exchange later, often to manage short-term currency funding.