Ünite 7: Foreign Exchange Market and Foreign Exchange Rate — Sınav Hazırlık Notları
Pay close attention to the quotation style (direct vs. indirect) used in exam questions, as this determines whether an increase in the exchange rate number means appreciation or depreciation.
Remember that the spot market settlement standard is T+2; any transaction with a maturity of 3 days or longer is classified as a forward transaction.
Do not confuse speculation with arbitrage: speculation operates across the time dimension (expecting future changes), while arbitrage operates across the place dimension (exploiting simultaneous geographic price differences).
In the short run, if domestic interest rates rise due to higher real interest rates, the currency appreciates. However, if they rise due to higher expected inflation, the currency depreciates.
For the exam, memorize the real exchange rate formula Er = E * (Pf / P) and be ready to calculate percentage changes by subtracting the domestic inflation rate from the sum of nominal change and foreign inflation.
Note that the expected exchange rate (Ee_t+1) in the interest rate parity equation is the variable that represents the forward exchange rate in financial risk management calculations.
