DIŞ TİCARET

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.

Purchasing Power Parity (PPP) Theory is based on a principle known as “law of one price”. This law claims that the entirely homogeneous (identical) goods should be sold with the same price even in different markets. Therefore, the correct option is E.

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. If the domestic interest rate is higher than the foreign interest rate, this indicates an expected depreciation in the domestic currency. Therefore, the correct option is B.

To calculate the forward exchange rate for $/ Tparity, we need spot rates that can be obtained from the banks’ quotations. Quotation is the price offer of a bank related to a financial asset. Therefore, the correct option is A.

According to Fisher Equation, the nominal interest rate in an economy is equal to the sum of the real interest rate and the expected inflation. Therefore, the correct option is C.

The Big Mac index was invented by The Economist in 1986 as a lighthearted guide to whether currencies are at their “correct” level. It is based on the theory of purchasing-power parity (PPP), the notion that in the long run exchange rates should move towards the rate that would equalize the prices of an identical basket of goods and services (in this case, a burger) in any two countries. Therefore, the correct option is E.

Real foreign exchange rate is the value of a domestic currency against foreign currencies corrected for the purchasing power. Cross foreign exchange rate is the value of foreign currency units in terms of each other. Foreign exchange rate is the price of a foreign currency in terms of the domestic currency. Spot exchange rate is the current exchange rate today for immediate delivery. Forward exchange rate is the exchange rate settled today for a payment or delivery that will be consummated in a future date.

Fundamental economic variables (like general price levels and real outputs) of two countries are the basic factors affecting the level of an exchange rate.

Factors that cause a change in the equilibrium exchange rate are the factors which are accepted as constant other than the current exchange rate. In macroeconomics, these factors include the real GDP, relative productivity, relative price level, barriers for international trade (like tariffs and quotas) and preferences between imported and domestically produced goods. However,  the theory, known as purchasing power parity, however, claims that the foreign exchange rate will solely be determined by the price level changes in both countries.

Purchasing Power Parity (PPP) Theory is based on a principle known as “law of one price”. This law claims that the entirely homogeneous (identical) goods should be sold with the same price even in different markets.

PPP Theory, domestic price level will be equal to the product of the exchange rate and the level of foreign price level. If we accept that the domestic country is Turkey and the foreign country is the USA, the general price level in Turkey (PTR) equals to the product of $/₺ (E$) and foreign price level (PUS):

PTR=E $×PUS

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.

If we know the spot market values of interest rate for both currencies and exchange rate, it is possible to calculate the expected exchange rate or, more accurately, the forward exchange rate.