Statement I is accurate. Purchasing Power Parity (PPP) is indeed a theory suggesting that exchange rates between currencies are in equilibrium when their purchasing power is equivalent. This means a basket of goods should cost the same in different countries when measured in a common currency. Statement II is also correct. The International Fisher Effect (IFE) posits that differences in nominal interest rates between two countries reflect expected changes in their exchange rates. Specifically, a country with a higher interest rate is expected to experience currency depreciation relative to a country with a lower interest rate. Statement III is incorrect. While government policies significantly influence exchange rates, they are not the sole determinant. Market sentiment, global economic conditions, and unexpected events also play crucial roles. Statement IV is also correct. Economic indicators such as GDP growth, inflation rates, and unemployment figures provide insights into a country’s economic health, which in turn affects its currency value. Strong economic performance typically leads to currency appreciation, while weak performance can lead to depreciation. Therefore, understanding these indicators is vital for FX traders. The correct combination is I, II & IV only.

The Hong Kong Exchange Rate System, established in 1983, is specifically designed to maintain exchange rate stability by linking the Hong Kong dollar (HKD) to the US dollar (USD) at a rate of HKD 7.80 per USD, with a permitted trading band. This system operates under the principles of Currency Board operations, where the Hong Kong Monetary Authority (HKMA) is required to hold sufficient USD reserves to back the entire monetary base. This mechanism ensures that changes in the HKD monetary base are fully backed by corresponding changes in USD reserves, thereby maintaining the credibility and stability of the exchange rate. The linked exchange rate system is crucial for Hong Kong’s financial stability, given its role as a major international financial center. The stability provided by this system helps to maintain investor confidence and facilitates international trade and investment flows. The HKMA actively manages the system through various measures, including intervention in the foreign exchange market, to ensure the exchange rate remains within the specified band. This intervention is conducted in a transparent manner to maintain market confidence and prevent speculative attacks on the HKD. The system’s success depends on the HKMA’s commitment to maintaining sufficient USD reserves and its ability to effectively manage market expectations.

Statement I is correct because purchasing power parity (PPP) suggests that exchange rates should adjust to equalize the prices of identical goods and services in different countries. This is a fundamental concept in exchange rate theory. Statement II is also correct. The International Fisher Effect (IFE) posits that differences in nominal interest rates between two countries reflect expected changes in their exchange rates. It suggests that a country with a higher interest rate will see its currency depreciate relative to a country with a lower interest rate. Statement III is incorrect. While government policies do influence exchange rates, they are not the sole determinant. Market sentiment, global economic conditions, and unexpected events also play significant roles. Statement IV is correct. Economic indicators such as GDP growth, inflation rates, and unemployment figures provide insights into a country’s economic health, which can influence investor confidence and, consequently, exchange rates. Therefore, the combination of I, II, and IV accurately reflects factors influencing foreign exchange rates, aligning with the principles tested in the Leveraged Foreign Exchange Traders Representative Examination Paper 2, particularly concerning market analysis and fundamental analysis.

Statement I is accurate. Purchasing Power Parity (PPP) suggests that exchange rates should adjust to equalize the purchasing power of currencies across countries. This implies that goods should cost the same in different countries when measured in a common currency, abstracting from transportation costs and trade barriers. Statement II is also correct. The International Fisher Effect (IFE) posits that differences in nominal interest rates between two countries are indicative of expected changes in exchange rates. Specifically, a country with a higher interest rate is expected to experience currency depreciation relative to a country with a lower interest rate. Statement III is incorrect. While government policies certainly influence exchange rates, the statement is too broad. Fiscal policy (government spending and taxation), monetary policy (central bank actions to control money supply and interest rates), and direct FX policies (intervention in the foreign exchange market) all have specific and nuanced effects. Not all government policies directly aim to manipulate exchange rates. Statement IV is correct. Economic indicators such as GDP growth, inflation rates, unemployment figures, and trade balances provide insights into a country’s economic health and can significantly impact its currency’s value. Strong economic performance typically leads to currency appreciation, while weak performance can lead to depreciation. Therefore, the correct combination is I, II & IV only.

The Bretton Woods system, established in 1944, aimed to create a stable international monetary system after World War II. A key feature was the pegging of various currencies to the U.S. dollar, which, in turn, was convertible to gold at a fixed rate. This arrangement provided stability and predictability in exchange rates, fostering international trade and investment. However, the system faced challenges as the U.S. dollar came under pressure due to increasing U.S. government spending and inflation. Eventually, the convertibility of the dollar to gold was suspended in 1971, effectively ending the Bretton Woods system. This led to a shift towards floating exchange rates, where currency values are determined by market forces. Understanding the historical context of the Bretton Woods system is crucial for comprehending the evolution of the foreign exchange market and the factors that influence exchange rate regimes today, as outlined in the Leveraged Foreign Exchange Traders Representative Examination Paper 2 syllabus.

Statement I is correct because the Bretton Woods system, established after World War II, aimed to create a stable international monetary system based on fixed exchange rates pegged to the US dollar, which was convertible to gold. This system provided a framework for international trade and investment for several decades. Statement II is also correct. Purchasing Power Parity (PPP) is a theory suggesting that exchange rates between currencies are in equilibrium when their purchasing power is equivalent in each of the two countries. In other words, a basket of goods should cost the same in different countries when measured in a common currency. Statement III is incorrect because discretionary trading gives the trader the authority to make trading decisions on behalf of the client, while non-discretionary trading requires the client’s explicit approval for each trade. Statement IV is correct. Liquidity risk in FX trading arises when it becomes difficult to find a counterparty to trade with, potentially leading to unfavorable prices or the inability to execute trades at all. This can be particularly acute during periods of high volatility or in less liquid currency pairs. Therefore, the correct combination is I, II & IV only.

Statement I is correct because purchasing power parity (PPP) is indeed a theory suggesting that exchange rates between currencies are in equilibrium when their purchasing power is equivalent. This means a basket of goods should cost the same in different countries when exchange rates are considered. Statement II is also correct. The International Fisher Effect (IFE) posits that differences in nominal interest rates between two countries reflect expected changes in their exchange rates. Specifically, a country with a higher interest rate is expected to experience currency depreciation relative to a country with a lower interest rate. Statement III is incorrect. The monetary model of exchange rate determination focuses on the relationship between money supply, price levels, and exchange rates. It suggests that changes in the relative money supplies of two countries will lead to changes in the exchange rate. It does not primarily focus on trade balances. Statement IV is correct because the forward rate can be used as a predictor of the future spot rate, although it is not always an accurate predictor due to factors like risk premiums and market inefficiencies. Therefore, the correct combination is I, II & IV only.

Statement I is correct because margin requirements in FX margin trading are indeed designed to protect both the brokerage and the trader by ensuring that traders have sufficient funds to cover potential losses. This is a fundamental aspect of risk management in leveraged trading. Statement II is also correct. Discretionary trading allows the broker to make trading decisions on behalf of the client, while non-discretionary trading requires the client’s explicit consent for each trade. Understanding the difference is vital for traders to control their investments. Statement III is correct as well. Profit and loss calculations in FX margin trading involve considering the trade size, the entry and exit prices, and the direction of the trade (buy or sell). These calculations determine the financial outcome of each trade. Statement IV is correct because understanding the factors that affect foreign exchange rates, such as government policies, economic performance, and international trade, is crucial for fundamental analysis. These factors can influence currency values and trading decisions. Therefore, all the statements are correct and essential for understanding FX margin trading and market analysis, aligning with the syllabus of the Leveraged Foreign Exchange Traders Representative Examination Paper 2.

The Bretton Woods system, established in 1944, aimed to create a stable international monetary system after the disruptions of the Great Depression and World War II. A key feature was the pegging of participating currencies to the US dollar, which was in turn convertible to gold at a fixed rate. This arrangement provided stability and predictability for international trade and investment. However, the system faced increasing strain in the late 1960s and early 1970s due to factors such as rising US inflation, balance of payments deficits, and speculative attacks on the dollar. The convertibility of the dollar to gold was eventually suspended in 1971, leading to the collapse of the Bretton Woods system and the transition to a system of floating exchange rates. Understanding the historical context and the reasons for the system’s breakdown is crucial for comprehending the evolution of the modern foreign exchange market and the challenges of maintaining exchange rate stability. This knowledge is relevant to the Leveraged Foreign Exchange Traders Representative Examination Paper 2, particularly the section on the history and development of the FX market.

Statement I is correct. Purchasing Power Parity (PPP) suggests that exchange rates should adjust to equalize the purchasing power of currencies across different countries. This means that a basket of goods should cost roughly the same in different countries when measured in a common currency. Statement II is also correct. The International Fisher Effect (IFE) posits that the difference in nominal interest rates between two countries is an unbiased predictor of future changes in the spot exchange rate. It suggests that currencies with higher interest rates will depreciate relative to currencies with lower interest rates. Statement III is incorrect. The Monetary Model of exchange rate determination focuses on the relationship between money supply, price levels, and exchange rates. It suggests that changes in the relative money supplies of two countries will lead to changes in the exchange rate. Statement IV is incorrect. While forward rates can provide some indication of future spot rates, they are not necessarily unbiased predictors. Factors such as risk premiums, transaction costs, and market expectations can cause deviations between forward rates and actual future spot rates. Therefore, only statements I and II accurately describe exchange rate theories.

Statement I is correct because purchasing power parity (PPP) is indeed a theory suggesting that exchange rates between currencies are in equilibrium when their purchasing power is equivalent. This means a basket of goods should cost the same in different countries when exchange rates are considered. Statement II is also correct. The International Fisher Effect (IFE) posits that differences in nominal interest rates reflect expected changes in exchange rates. Countries with higher interest rates are expected to experience currency depreciation. Statement III is incorrect because the monetary model of exchange rate determination focuses on the relationship between money supply, price levels, and exchange rates. It suggests that changes in the relative money supplies of two countries will lead to changes in the exchange rate. Statement IV is incorrect as the forward rate is not necessarily an unbiased predictor of the future spot rate. While it reflects market expectations, various factors like risk premiums and market sentiment can cause deviations. Therefore, only statements I and II are accurate descriptions of the exchange rate theories mentioned. These theories are fundamental in understanding the factors that influence foreign exchange rates and are relevant to leveraged foreign exchange traders.

Statement I is correct because purchasing power parity (PPP) is a theory suggesting that exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries. This means that a basket of goods should cost the same in both countries when measured in the same currency. Statement II is also correct. The International Fisher Effect (IFE) posits that differences in nominal interest rates reflect expected changes in exchange rates. Specifically, a country with a higher nominal interest rate is expected to experience currency depreciation relative to a country with a lower nominal interest rate. Statement III is correct as well. The monetary model of exchange rate determination suggests that exchange rates are primarily determined by relative money supplies and relative price levels between countries. Changes in these factors can lead to exchange rate fluctuations. Statement IV is also correct. The forward rate as an unbiased predictor of the future spot rate implies that the current forward exchange rate is the market’s best prediction of what the spot exchange rate will be at the time of settlement of the forward contract. While not always accurate due to factors like risk premiums and market inefficiencies, it serves as a benchmark for expectations. Understanding these theories is crucial for leveraged foreign exchange traders as they provide frameworks for analyzing and predicting exchange rate movements, which directly impacts trading strategies and risk management. These concepts are relevant to the Leveraged Foreign Exchange Traders Representative Examination Paper 2, particularly under the ‘Market Analysis’ section, specifically ‘Fundamental Analysis’.

The Bretton Woods system, established in 1944, aimed to create a stable international monetary system after the disruptions of the Great Depression and World War II. A key feature was the pegging of participating countries’ currencies to the US dollar, which was in turn convertible to gold at a fixed rate of $35 per ounce. This arrangement provided exchange rate stability, facilitating international trade and investment. However, the system faced challenges as the US dollar came under pressure due to increasing US deficits and inflation. The convertibility of the dollar to gold became unsustainable, leading to the eventual collapse of the Bretton Woods system in the early 1970s. The collapse led to widespread floating exchange rates among major currencies. Understanding the historical context of the Bretton Woods system is crucial for comprehending the evolution of modern exchange rate regimes and the factors that influence currency valuations today. This knowledge is relevant to leveraged foreign exchange traders as it provides insights into the potential impacts of government policies and economic conditions on currency values, as outlined in the Market Knowledge section of the Leveraged Foreign Exchange Traders Representative Examination Paper 2.

Statement I is correct because margin requirements in FX margin trading are indeed designed to mitigate credit and counterparty risk. By requiring traders to deposit a certain amount of funds as collateral, brokers can protect themselves against potential losses if the trader defaults on their obligations. This aligns with regulatory requirements aimed at ensuring the stability of the financial system and protecting investors, as outlined in guidelines for Leveraged Foreign Exchange Traders. Statement II is also correct. Mark-to-market is a crucial process where positions are revalued based on current market prices. This daily or intraday revaluation helps in accurately reflecting the profit or loss on a trader’s position. It is a standard practice in FX margin trading to manage risk and ensure transparency. Statement III is incorrect because while risk diversification is a sound investment principle, it’s not a primary method to reduce risk in a house position in FX trading. House positions are managed through hedging, position limits, and stop-loss orders, not diversification. Statement IV is correct. Liquidation of position is indeed a measure taken by brokers when a trader fails to meet a margin call. This action is designed to limit further losses and protect the broker’s capital. The broker has the right to close out the position to recover the funds owed. Therefore, the correct combination is I, II & IV only.

Statement I is correct because margin requirements in FX margin trading are indeed influenced by factors such as the volatility of the currency pair. Higher volatility typically leads to higher margin requirements to protect the broker from potential losses. Statement II is also correct. Discretionary trading allows the broker to make trading decisions on behalf of the client, while non-discretionary trading requires the client’s explicit instructions for each trade. This distinction affects how trades are executed and who bears the responsibility for trading decisions. Statement III is incorrect because profit and loss calculations in FX margin trading are not solely based on initial margin. They are determined by the difference between the opening and closing prices of the trade, adjusted for the trade size and any associated fees or interest. Statement IV is correct because margin calls are triggered when the equity in the account falls below the maintenance margin level. This is a crucial mechanism to protect the broker from losses when the market moves against the trader’s position. Therefore, the correct combination is I, II & IV only. Understanding these aspects of FX margin trading is essential for leveraged foreign exchange traders, as it directly impacts their risk management and trading strategies, aligning with the requirements of the Leveraged Foreign Exchange Traders Representative Examination Paper 2.

Statement I is correct because margin requirements in FX margin trading are indeed determined by the broker, often influenced by regulatory guidelines to manage risk. These requirements act as a security deposit to cover potential losses. Statement II is also correct; discretionary trading allows the broker to make trading decisions on behalf of the client, while non-discretionary trading requires the client’s explicit instructions for each trade. This distinction is crucial for understanding the level of control a client has over their account. Statement III is correct as profit and loss in FX margin trading are calculated based on the difference between the opening and closing prices of the currency pair, adjusted for the trade size and any applicable commissions or fees. Statement IV is also correct; understanding the risks associated with leveraged FX trading is crucial, and risk management strategies like setting stop-loss orders and managing leverage are essential for mitigating potential losses. These strategies help traders limit their exposure and protect their capital. Therefore, all the statements are correct and relevant to FX margin trading as per the Leveraged Foreign Exchange Traders Representative Examination Paper 2 syllabus.

The Hong Kong Interbank Offered Rate (HIBOR) serves as a benchmark interest rate reflecting the cost of interbank lending within Hong Kong’s money market. It is crucial for pricing various financial products, including loans and derivatives. Understanding HIBOR’s calculation and the factors influencing it is essential for FX traders to assess market liquidity and funding costs. HIBOR is determined by a panel of reference banks submitting their quotes for different tenors, and an averaging methodology is applied after excluding the highest and lowest quotes. Factors such as liquidity conditions, credit risk perceptions, and monetary policy decisions can significantly impact HIBOR levels. FX traders need to monitor HIBOR movements to gauge market sentiment and adjust their trading strategies accordingly. Changes in HIBOR can affect the attractiveness of Hong Kong dollar-denominated assets and influence capital flows, ultimately impacting exchange rates. Knowledge of HIBOR is vital for managing funding costs, pricing FX products, and assessing overall market risk in Hong Kong’s financial market. The Hong Kong interbank money market and HIBOR are important for leveraged foreign exchange traders.

Statement I is correct. The Bretton Woods system, established after World War II, aimed to create a stable international monetary system by pegging currencies to the US dollar, which was in turn convertible to gold. This system facilitated international trade and investment by reducing exchange rate volatility.

Statement II is incorrect. While the European Monetary System (EMS) did aim to foster monetary cooperation, its primary goal was to stabilize exchange rates among European currencies in preparation for economic and monetary union. The Euro was a later development that replaced the individual currencies of participating member states.

Statement III is correct. Floating exchange rate systems allow currency values to fluctuate based on market forces of supply and demand. This contrasts with fixed or pegged systems where governments intervene to maintain a specific exchange rate. Floating rates can provide flexibility in adjusting to economic shocks but can also introduce volatility.

Statement IV is incorrect. Linked exchange rate systems, such as the one used by Hong Kong, peg the local currency to another currency (in Hong Kong’s case, the US dollar) within a narrow band. This provides stability but limits monetary policy independence.

The Bretton Woods system, established in 1944, aimed to create a stable international monetary system after World War II. A key feature was the pegging of participating currencies to the US dollar, which was in turn convertible to gold at a fixed rate. This arrangement provided stability and predictability in exchange rates, facilitating international trade and investment. However, the system faced challenges as the US dollar came under pressure due to increasing US government spending and inflation. This led to a decline in confidence in the dollar’s convertibility to gold. Eventually, in 1971, the US suspended the dollar’s convertibility to gold, effectively ending the Bretton Woods system. This transition marked a shift towards floating exchange rates, where currency values are determined by market forces rather than fixed pegs. Understanding the rise and fall of Bretton Woods is crucial for comprehending the evolution of modern exchange rate regimes and the factors that influence currency values. This knowledge is relevant to the Leveraged Foreign Exchange Traders Representative Examination Paper 2, particularly in the context of market knowledge and the history and development of the FX market.

Statement I is correct because margin requirements are a crucial aspect of FX margin trading, designed to mitigate credit risk by ensuring traders have sufficient funds to cover potential losses. These requirements are typically a percentage of the total trade value. Statement II is also correct; different order types, such as market orders, limit orders, and stop-loss orders, significantly impact how trades are executed in the FX market. The choice of order type affects the price at which a trade is executed and the level of control a trader has over the execution process. Statement III is incorrect because discretionary trading allows the broker to make trading decisions on behalf of the client, while non-discretionary trading requires the client’s explicit instructions for each trade. Statement IV is correct because profit and loss calculation is a fundamental aspect of FX margin trading, involving factors such as the entry and exit prices, the size of the position, and any associated fees or commissions. Understanding how to calculate profit and loss is essential for managing risk and evaluating trading performance. Therefore, the correct combination is I, II & IV only.

The Bretton Woods system, established in 1944, aimed to create a stable international monetary system after World War II. A key feature was the pegging of participating currencies to the US dollar, which was in turn convertible to gold at a fixed rate. This arrangement provided stability and predictability in exchange rates, facilitating international trade and investment. However, the system faced challenges as the US dollar came under pressure due to increasing US government spending and inflation. The convertibility of the dollar to gold became unsustainable, leading to the eventual collapse of the Bretton Woods system in the early 1970s. This collapse marked a shift towards floating exchange rate systems, where currency values are determined by market forces rather than fixed pegs. The historical context and inherent limitations of the Bretton Woods system are crucial for understanding the evolution of modern foreign exchange markets and the factors influencing exchange rate dynamics. Understanding the historical context helps traders to appreciate the complexities of modern exchange rate regimes and the potential for instability.

Statement I is accurate. The Bretton Woods system, established post-World War II, aimed to create a stable international monetary system by pegging various currencies to the U.S. dollar, which was in turn convertible to gold. This facilitated international trade and investment by reducing exchange rate volatility. Statement II is also correct. The European Monetary System (EMS) was a precursor to the Eurozone and aimed to stabilize exchange rates among European countries. It introduced the Exchange Rate Mechanism (ERM), which limited exchange rate fluctuations between participating currencies. Statement III is incorrect. While purchasing power parity (PPP) suggests that exchange rates should adjust to equalize the prices of identical goods and services across countries, it is not a perfect predictor of exchange rates. Numerous factors, such as trade barriers, transportation costs, and non-tradable goods, can cause deviations from PPP. Statement IV is correct. The International Fisher Effect (IFE) posits that differences in nominal interest rates between two countries reflect expected changes in their exchange rates. It suggests that a country with a higher interest rate is expected to experience currency depreciation relative to a country with a lower interest rate. Therefore, the correct combination is I, II & IV only.

Statement I is correct because margin requirements are a crucial aspect of FX margin trading, acting as a security deposit to cover potential losses. These requirements are set by the broker and can vary depending on the currency pair and the leverage offered. Statement II is also correct. Different order types, such as market orders, limit orders, and stop-loss orders, are used in FX margin trading to manage risk and execute trades at desired price levels. The execution of these orders is subject to market conditions and the broker’s capabilities. Statement III is correct because discretionary trading allows the trader to make independent decisions, while non-discretionary trading involves following pre-set rules or signals. Understanding the difference is vital for managing risk and implementing trading strategies. Statement IV is correct because calculating profit and loss is fundamental to FX margin trading. It involves understanding how changes in exchange rates affect the value of the position, considering factors like the size of the trade, the entry and exit prices, and any associated fees or commissions. All these aspects are crucial for a leveraged foreign exchange trader to understand and apply in their trading activities, ensuring compliance with regulatory standards and promoting responsible trading practices as expected by the Leveraged Foreign Exchange Traders Representative Examination Paper 2.

Statement I is correct because purchasing power parity (PPP) suggests that exchange rates should adjust to equalize the prices of identical goods and services in different countries. This is a fundamental concept in exchange rate theory. Statement II is also correct; the International Fisher Effect (IFE) posits that differences in nominal interest rates between two countries reflect expected changes in their exchange rates. This theory links interest rate differentials to future spot rates. Statement III is incorrect. While government policies certainly influence exchange rates, the forward rate is not a guaranteed predictor of the future spot rate. It represents a market expectation, which can be influenced by various factors and may not always align with the actual future spot rate. Statement IV is correct because economic indicators such as GDP growth, inflation, and unemployment rates significantly impact a country’s currency value. Strong economic performance typically leads to currency appreciation, while weak performance can lead to depreciation. Therefore, understanding these indicators is crucial for FX traders. The correct combination is I, II & IV only.

Statement I is correct because Purchasing Power Parity (PPP) suggests that exchange rates should adjust to equalize the purchasing power of currencies across different countries. This means that goods should cost roughly the same in different countries when measured in a common currency. Statement II is also correct. The International Fisher Effect (IFE) posits that differences in nominal interest rates between two countries are reflected in exchange rate movements. Specifically, a country with a higher interest rate is expected to experience currency depreciation relative to a country with a lower interest rate. Statement III is incorrect. The Monetary Model of exchange rate determination focuses on the relationship between money supply, price levels, and exchange rates. It suggests that changes in the relative money supplies of two countries will lead to changes in exchange rates. Statement IV is incorrect. While forward rates can provide some indication of future spot rates, they are not necessarily unbiased predictors. Factors such as risk premiums, market sentiment, and expectations can cause deviations between forward rates and actual future spot rates. Therefore, the combination of I & II only is the correct answer.

Statement I is accurate. The Bretton Woods system, established post-World War II, aimed to stabilize exchange rates by pegging currencies to the US dollar, which was in turn convertible to gold. This system provided a framework for international monetary cooperation and trade. Statement II is also correct. The European Monetary System (EMS) was a precursor to the Eurozone, designed to stabilize exchange rates among European countries. It involved mechanisms like the Exchange Rate Mechanism (ERM) to manage currency fluctuations. Statement III is incorrect. While floating exchange rate systems allow market forces to determine currency values, governments often intervene to manage volatility or achieve specific economic objectives. This intervention can take various forms, such as direct buying or selling of currency, or adjusting interest rates. Statement IV is incorrect. The Hong Kong exchange rate system is a linked exchange rate system, specifically a currency board. It links the Hong Kong dollar to the US dollar at a fixed rate, providing stability and credibility to the currency. Therefore, the correct combination is I & II only.

Statement I is accurate. Purchasing Power Parity (PPP) suggests that exchange rates should adjust to equalize the purchasing power of currencies across countries. This means that a basket of goods should cost roughly the same in different countries when measured in a common currency. Statement II is also correct. The International Fisher Effect (IFE) posits that differences in nominal interest rates between two countries are reflected in expected changes in their exchange rates. High-interest rate currencies are expected to depreciate relative to low-interest rate currencies. Statement III is incorrect. The Monetary Model of exchange rate determination emphasizes the role of money supply and demand in influencing exchange rates. It suggests that changes in relative money supplies and income levels affect exchange rates. Statement IV is incorrect. While forward rates can provide some indication of future spot rates, empirical evidence suggests that they are not unbiased predictors. Factors like risk premia, market sentiment, and other market imperfections can cause deviations between forward rates and actual future spot rates. Therefore, only statements I and II are correct.

Statement I is accurate. The Bretton Woods system, established post-World War II, aimed to create a stable international monetary system by pegging currencies to the US dollar, which was in turn convertible to gold. This system facilitated international trade and investment but ultimately collapsed in the early 1970s due to various economic pressures, including the US’s increasing trade deficits and inflation.

Statement II is also correct. The European Monetary System (EMS) was established in 1979 to foster monetary cooperation in Europe and create a zone of currency stability. It involved mechanisms like the Exchange Rate Mechanism (ERM), which aimed to limit exchange rate fluctuations between participating currencies. The EMS was a precursor to the Euro, which further integrated European economies by establishing a single currency.

Statement III is incorrect. While purchasing power parity (PPP) is a theory suggesting that exchange rates should adjust to equalize the prices of identical goods and services in different countries, it is not a perfect predictor of exchange rates. Numerous factors, such as trade barriers, transportation costs, and non-tradable goods, cause deviations from PPP. Therefore, relying solely on PPP for predicting exchange rates can be misleading.

Statement IV is incorrect. While economic indicators are important, government policies are also important. Government policies such as fiscal, monetary and FX policies can affect foreign exchange rates. Therefore, relying solely on economic indicators for predicting exchange rates can be misleading.

The Bretton Woods system, established in 1944, aimed to create a stable international monetary system after World War II. A key feature was the pegging of various currencies to the US dollar, which was in turn convertible to gold at a fixed rate. This arrangement provided stability and predictability in exchange rates, fostering international trade and investment. However, the system faced challenges as countries experienced different economic conditions and pressures on their exchange rates. The fixed exchange rates became unsustainable due to factors such as inflation differentials and speculative capital flows. Eventually, the system collapsed in the early 1970s when the US suspended the dollar’s convertibility to gold. The collapse of the Bretton Woods system led to the widespread adoption of floating exchange rate systems, where currency values are determined by market forces of supply and demand. Understanding the history and evolution of exchange rate systems, including the Bretton Woods system, is essential for FX traders as it provides context for the current market dynamics and the factors influencing currency values. This knowledge helps traders to assess risks and opportunities in the FX market and make informed trading decisions, aligning with the requirements of the Leveraged Foreign Exchange Traders Representative Examination Paper 2.

Statement I is correct because Purchasing Power Parity (PPP) suggests that exchange rates should adjust to equalize the purchasing power of currencies across countries. This means that goods should cost the same in different countries when measured in a common currency. Statement II is also correct. The International Fisher Effect (IFE) posits that differences in nominal interest rates between two countries reflect expected changes in their exchange rates. Specifically, a country with a higher interest rate is expected to experience currency depreciation relative to a country with a lower interest rate. Statement III is incorrect. The Monetary Model of exchange rate determination focuses on the relationship between money supply, price levels, and exchange rates. It suggests that changes in the money supply can lead to changes in price levels, which in turn affect exchange rates. While government policies are considered, the model primarily emphasizes monetary factors rather than solely fiscal policies. Statement IV is incorrect. While the forward rate can provide some indication of future spot rates, it is not necessarily an unbiased predictor. Factors such as risk premiums, market sentiment, and expectations can cause deviations between the forward rate and the actual future spot rate. Therefore, the correct combination is I & II only.