Currency valuation refers to determining the value of one currency relative to another. At the same time, effective exchange rates are weighted averages of a country's currency relative to an index or basket of other currencies. These concepts are crucial for investors and financial professionals to understand the impact of currency fluctuations on investments and international trade.
What is the primary difference between spot exchange rates and forward exchange rates?
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A) Spot exchange rates are for immediate delivery, while forward exchange rates are for future delivery. B) Spot exchange rates are not adjusted for inflation or forward exchange rates. C) Spot exchange rates are based on currency values, as are forward exchange rates. D) Spot exchange rates are used for international trade, as are forward exchange rates.
Which of the following factors can cause a currency to appreciate?
A) Higher inflation typically causes a currency to depreciate. B) Lower interest rates typically cause a currency to depreciate. C) Increased demand for the currency can cause it to appreciate. D) A decrease in the country's GDP typically causes a currency to depreciate.
What is the purpose of purchasing power parity (PPP)?
A) The purpose of purchasing power parity is not to measure the value of a currency relative to an index or basket of other currencies. B) The purpose of purchasing power parity does not determine the exchange rate for the immediate delivery of currencies. C) The purpose of purchasing power parity is to suggest that exchange rates should adjust to equalize the price of goods and services between countries. D) The purpose of purchasing power parity is not to calculate the nominal exchange rate adjusted for inflation.
In the early 2000s, a significant currency crisis occurred in Argentina, leading to a sharp depreciation of the Argentine peso. This depreciation had substantial effects on the country's economy, including high inflation, a decrease in purchasing power, and a decline in international trade.
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Example Series 65 Example Practice Question
A US investor holds stocks in a European company. If the euro's value appreciates relative to the US dollar, the investor's returns will increase when converted back to US dollars. Conversely, if the euro depreciates, the investor's returns will decrease.