International Business

Chapter 9

1. What are the two basic functions of the foreign market exchange?

A. Convert the currency of one country into the currency of another.

B. Provide some insurance against foreign exchange risk.

2. What is currency speculation, appreciation, depreciation

C. Currency speculation: investment involving the short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates.

D. Currency depreciation: It is when a country’s currency loses its value compared to other country.

E. Currency appreciation: It is when a country’s currency gains its value compared to others

3. 3 factors that influence exchange rate

F. The demand and supply of a currency relative to the demand and supply of other currencies.

G. Changes in relative prices. (the changes in countries’ price levels=inflation rate)

H. Investor psychology and bandwagon effect

4. Concept of PPP(Purchasing Power Parity)

I. Links changes in the exchange rate between two countries’ currencies to changes in the countries’ price levels.

5. What is fisher effect theory?

J. States that country’s nominal interest rate is the sum of the required real rate of interest and the expected rate of inflation over the period for which the funds are to be lent.

6. What is investor psychology

K. Plays important role in determining the expectations of market traders as to likely future exchange rates.

L. Influenced by political factors and by microeconomic events

Chapter 10

1. What is fixed exchange rate system?

A. A system under which the exchange rate for converting one currency into another is set at a constant rate.

2. What is floating exchange rate system?

B. A system under which the exchange rate for converting one currency into another is continuously adjusted depending on the law of supply and demand.

3. The role of IMF

C. Maintaining...