If the exchange rate has changed from 1 local currency unit LCU) to 5 foreign currency unitsFCUs) to a rate of 1 LCU to 5.5 FCUs,
Answer(s): A
If the exchange rate changes from 1 LCU to 5 FCUs to 1 LCU to 5.5 FCUs, the LCU has appreciated by 10% [(5.5 - 5) 5].
The value of the domestic currency in relation to foreign currencies is:
Answer(s): D
Exchange rates are determined by the forces of supply and demand on the exchange markets. Often other forces try to intervene in this process of exchange rate determination, but these reflect only short-run policies. An example of this type of policy would be government or central bank intervention in the international money markets.
A domestic entity and a foreign entity purchased the same stock on the foreign stock exchange and held the stock for 1 year. The value of the foreign currency weakened against the domestic currency over this period. Comparing the returns of the two companies, what will be the domestic entity's return?
The returns on the stock are presumably paid in foreign currency. Hence, the change in the value of the foreign currency relative to the domestic currency does not affect the foreign entity's return. However, the weakening of the foreign currency reduces the amount of domestic currency it will buy, and the domestic entity's return in domestic currency is correspondingly reduced.
If the central bank of a country raises interest rates sharply, the country's currency will likely:
Exchange rates fluctuate depending upon the demand for each country's currency. If a country raises its interest rates, its currency will appreciate. The demand for investment at the higher interest rates will shift the demand curare for the currency to the right. The reverse holds true for a decrease in interest rates.
Assuming that the real rate of interest is the same in both countries, if Country A has a higher nominal interest rate than Country B, the currency of Country A will likely be selling at a:
If the real rates of interest are equal, the country with the higher nominal interest rate is expected to experience a higher rate of inflation. A higher rate of inflation is associated with a devaluing currency, so the currency of the country with the higher nominal interest rate will likely be selling at a forward discount.
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