the availability of money and credit in the economy, and serves as the bank to commercial banks. | | | | European Central Bank (ECB) | The central authority, located in Frankfurt, Germany, which oversees monetary policy in the common currency area. | | | | Federal Reserve System | The central bank responsible for monetary policy in the United States. | | | | Financial institutions | Firms, such as banks and insurance companies, that provide access to the financial
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respectively. If the 1987 $/DM exchange rate was $0.54, what should the exchange rate be in 1988? In fact, the exchange rate in 1988 was DM 1 = $0.56. What might account for the discrepancy? (Price levels were measured using the consumer price index.) Answer. If e1981 is the dollar value of the German mark in 1988, then according to purchasing power parity e1988/.54 = 106/102 or e1988 = $.5612. The discrepancy between the predicted rate of $.5612 and the actual rate of $.56 is insignificant and hence
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7—International Arbitrage and Interest Rate Parity 1. Due to ____, market forces should realign the relationship between the interest rate differential of two currencies and the forward premium (or discount) on the forward exchange rate between the two currencies. a.|forward realignment arbitrage| b.|triangular arbitrage| c.|covered interest arbitrage| d.|locational arbitrage| ANS: C PTS: 1 2. Due to ____, market forces should realign the spot rate of a currency among banks. a.|forward
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contractual obligation. Credit risk arises whenever a borrower is expecting to use future cash flows to pay a current debt. Investors are compensated for assuming credit risk by way of interest payments from the borrower or issuer of a debt obligation. The higher the perceived credit risk, the higher the rate of interest that investors will demand for lending their capital. Credit risks are calculated based on the borrowers' overall ability to repay. This calculation includes the borrowers' collateral
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Solutions for exchange rate policy of transition economy of Vietnam Dissertation zur Erlangung des Grades Doktor der Wirtschaftswissenschaft (Doctor rerum politicarum, Dr. rer. pol.) der Juristischen und Wirtschaftswissenschaftlichen Fakultät der Martin-Luther-Universität Halle-Wittenberg vorgelegt von M.A. Mai Thu Hien geb. am 23. August 1976 in Hanoi, Vietnam Gutachter: 1. Prof. Dr. Dr. h.c. Rüdiger Pohl, Martin-Luther-Universität Halle-Wittenberg 2. Prof. Dr. Martin Klein, Martin-Luther-Universität
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EXCHANGE MARKET MECHANISM Objective 1. Definition 2. Quotation Systems a) Direct vs. Indirect b) Spot Rate vs. Forward Rate c) Bid vs. Ask d) Outright vs. Point e) Premium vs. Discount f) Cross Rates g) Appreciation vs. Depreciation 3. Potential Activities a) Arbitrage b) Hedging
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International trade comprises exports and imports, the net result of which affects our GDP. Since our imports exceed our exports, our GDP would be impacted by our net exports or deficits. “The rippling effect of financing deficits is an increase in interest rates from selling bonds that reduces investments and growth. This further reduces GDP” (Colander. 2010). Domestic markets flourish when there is a demand for local products overseas. If the domestic markets have to compete with imported products it
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these risks are: Currency Exchange Risk This is a form of financial risk which arises when there is a potential change in the exchange rate of one currency against another. The persons who are mostly affected by this risk are investors and businesses who have assets and operations across international borders. They can also be faced with this risk if they have a loan or borrowings in a foreign currency. An example of this risk is if a dollar gets stronger against a foreign currency, reducing value
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Chapter 3—International Financial Markets 1. Assume that a bank's bid rate on Swiss francs is $.45 and its ask rate is $.47. Its bid-ask percentage spread is: a.|about 4.44%.| b.|about 4.26%.| c.|about 4.03%.| d.|about 4.17%.| ANS: B SOLUTION:|Bid-ask percentage spread = ($.47 - $.45)/$.47 = 4.26%| PTS: 1 2. Assume that a bank's bid rate on Japanese yen is $.0041 and its ask rate is $.0043. Its bid-ask percentage spread is: a.|about 4.99%.| b.|about 4.88%.| c.|about 4.65%
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exchange rate for multinational companies with subsidiaries which are located in countries with systems such as managed floating exchange rate, fixed exchange rate linked to a basket of currencies and also a fixed exchange rate backed by a currency board system. Unlike the freely floating exchange rate system which has never been applied under its purest form, monetary authorities is required by the managed floating rate in order to interfere in foreign exchange markets to prevent the currencies from
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