DIŞ TİCARET - Deneme Sınavı - 5

If we assume that there is a perfect substitution between two assets with different currencies, the relationship between expected returns produces some important conclusions about the determination of foreign exchange rate between the two currencies. First, we should question the meaning and validity of this assumption. Today, depending upon the globalization process in the world economy, capital is a production factor with a very high mobility. The correct answer is " E ".

The last factor changing the equilibrium exchange rate in the interest rate parity approach is the changes in domestic interest rate (iT) paid for Turkish lira assets. The correct answer is " A ".

Real foreign exchange rate: The value of a domestic currency against foreign currencies corrected for the purchasing power is called the real foreign exchange rate

Real Fx Rate = Nominal FX Rate x ForeignPrice
                                    DomesticPrice

forward exchange rate is the exchange rate settled today for a payment or delivery that will be consummated in a future date.

price increases in two countries, barriers to free trade, preferences between imported and domestically produced goods and relative productivity affect the demand and supply of foreign exchange and cause a change in the equilibrium level of foreign exchange rate

The PPP Theory points out an important fact: If the prices in the home country increase more than the prices in the foreign country, domestic currency must depreciate. On the contrary, if the prices in the foreign country increase more than the prices in the home country, domestic currency must appreciate.

The law of one price: It states that entirely homogeneous (identical) goods should be sold with the same price even in different markets.

The interest parity condition states that the domestic interest rate is equal to the
total of foreign interest rate and to the expected rate of change in the foreign exchange rate

The Big Mac index was invented by The Economist in 1986 as a lighthearted guide to whether currencies are at their “correct” level.

The Central Bank of the Republic of Turkey (CBRT) monthly publishes the real effective exchange rate on its internet site via Electronic Data Delivery System

Spot exchange rate: It is the current exchange rate today for immediate delivery.

If we explain the value of one unit of foreign currency in terms of domestic currency (like 1$ = 5.65₺ or 1€ = 6,32₺), it is the direct foreign exchange rate and shown as $/₺ or €/₺. On the contrary, if we explain the value of one unit of domestic currency in terms foreign currency (like 1₺= 0.18$ or 1₺= 0.16€), it is the indirect foreign exchange rate and shown as ₺/$ or ₺/€. The value of foreign currency units in terms of each other is called as the cross foreign exchange rate (sometimes shortly cross rate) like 1$ = 0.89€ or 1€ = 1.12$.

Since the current exchange rate is $/₺= 5.53 and you used 12$ to buy, this T-shirt costs you in terms of Turkish lira:

12$ x 5.53$/₺ = 66.33₺

When the amount of Turkish lira decreases to buy 1 US dollar, the total amount you should pay also decreases and foreign goods are cheaper. In other words, domestic currency gains value and it is known as the appreciation of the domestic currency. Under the assumption, however, when the amount of Turkish lira increases to buy 1 US dollar, the total amount you should pay also increases and foreign goods are expensive. In other words, domestic currency loses its value against the dollar and it is known as the depreciation of domestic currency.

In order to buy a unit of currency, the amount that must be foregone in the other currency is the foreign exchange rate. In other words, the foreign exchange rate is the price of one unit of currency in terms of the other. Therefore, the correct option is B.

The value of foreign currency units in terms of each other is called as the cross foreign exchange rate (sometimes shortly cross rate). Therefore, the correct option is A.

The value of a domestic currency against foreign currencies corrected for the purchasing power is called the real foreign exchange rate. Therefore, the correct option is C.

Spot exchange rate: It is the current exchange rate today for immediate delivery. However, forward exchange rate is the exchange rate settled today for a payment or delivery that will be consummated in a future date. Therefore, the correct option is D.

Price increases in two countries, barriers to free trade, preferences between imported and domestically produced goods and relative productivity affect the demand and supply of foreign exchange and cause a change in the equilibrium level of foreign exchange rate. Therefore, the correct option is C.