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CFA ECO 7: Capital flows and the FX market - Coggle Diagram
CFA ECO 7: Capital flows and the FX market
Describe the foreign exchange market
its functions and participants
large multinational banks
Real money accounts
refer to mutual funds, pension funds, insurance companies, and other institutional accounts that do not use derivatives
Leveraged accounts
refer to the various types of investment firms that use derivatives, including hedge funds, firms that trade for their own accounts, and other trading firms of various types
distinguish between nominal and real exchange rates
spot exchange rate
forward exchange rate
calculate and interpret the
percentage change in a currency relative to another currency
:pencil2:
Exchange rate
written Price currency / Base currency
which reads as "how many units of the price currency does it cost to buy 1 unit of the base currency?
Direct quote
when the domestic currency is the price currency and the foreign currency is the base currency.
It tells you how much home money you pay for one unit of foreign money
Appreciation
means the currency gains purchasing power against other currencies: each unit of it buys more foreign currency than before.
Indirect quote
the other way around
changing from direct to indirect quote and vice versa :pencil2:
Describe exchange rate regimes
Explain the effects of exchange rates on countries’ international trade and capital flows
Countries That Do Not Have Their Own Currency
A country can use the currency of another country
(formal dollarization)
. The country cannot have its own monetary policy, as it does not create money or issue currency.
A country can be a member of a
monetary union
Countries That Have Their Own Currency
currency board arrangement
conventional fixed peg arrangement
target zone
crawling peg
management of exchange rates within crawling bands
managed floating exchange rates
independently floating
Changes in Exchange Rates
balance of payments
trade deficit
capital account deficit
Describe common objectives of capital restrictions imposed by governments
Reduce the volatility of domestic asset prices.
Maintain fixed exchange rates
Keep domestic interest rates low
Protect strategic industries