1. The Foreign Exchange Market
a. define an exchange rate and distinguish between nominal and real exchange rates and spot and forward exchange rates;
b. describe functions of and participants in the foreign exchange market;
What is an exchange rate?
An exchange rate is the current market price at which one currency can be exchanged for another.
What is the nominal exchange rate?
Nominal exchange rate is the number of units of one currency (price currency) that one unit of another currency (base currency) will buy.
What is the real exchange rate? How is it different from the nominal exchange rate?
The real exchange rate is the nominal rate adjusted by inflation measures.