FIN 621 Study Guide - Midterm Guide: Interest Rate Parity, Demand Deposit, Currency Intervention
Document Summary
Fixed exchange rate countries: under a fixed exchange rate system, the government bears the responsibility to ensure that the bop is near zero. Floating exchange rate countries: under a floating exchange rate system, the government has no responsibility to peg its foreign exchange rate. Managed floats: countries operating with a managed float often find it necessary to take action to maintain their desired exchange rate values. If the balance is not zero for long time, it is a disequilibrium and will be corrected by the market in the long run. Several scenarios possible, material for international economics course. Price of home currency is the exchange rate: # units of local currency / 1 unit of foreign currency (direct) # units of foreign currency / 1 unit of local currency (indirect) Fx rate indicates the number of price currency units per unit of base currency. Usd/eur rate of 1. 2735 means the euro (base currency) costs 1. 2735 u. s. dollars.