Forex Market

5 important questions on Forex Market

Which two kinds of exchange rate transactions make up the foreign exchange market?

Spot transactions and forward transactions

If currency of your country appreciates ...

Country's goods prices increase abroad and foreign goods prices decrease in your country

  • Makes domestic businesses less competitive
  • Benefits domestic consumers

How is FX trade in OTC market?

  1. Buying and selling bank deposits denominated in different currencies
  2. Trades have amount > 1 million
  3. Buy foreign currencies from retail dealers
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Factors Affecting Exchange Rates in LR

Principle: demand domestic goods increases -> exchange rate increases
  • Price levels: rise in relative prece level -> currency depreciates
  • Tariffs and quotas: increasing trade barriers -> currency appreciates
  • Preferences for domestic vs.  foreign goods:
    • increased demand for country's good -> currency appreciates
    • increased demand for imports -> currence depreciates
  • Productivity: country is relatively more productive -> currency appreciates

Domestic currency and real interest rate and expected inflation

  • Increase in domestic real interest rate -> domestic currency appreciates
  • Increase in domestic expected inflation -> domestic currency depreciates

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