CFA Level I · CFA Level I Exam · Capital Flows and the FX Market
A small country fixes its currency at a set rate to a larger neighbor's currency and issues domestic currency only when it receives an equivalent amount of the neighbor's currency in reserve. This arrangement is best described as a:
This is a currency board. The authority fixes the exchange rate and issues domestic currency only against equivalent foreign currency reserves, which removes discretionary monetary policy. A crawling peg changes its rate on a schedule, and a managed float allows market-driven movement with intervention.
- Acrawling peg
- Bcurrency boardCorrect
- Cmanaged float
Explanation
Under a currency board, the central bank commits to exchange domestic currency for the foreign currency at a fixed rate and holds foreign reserves backing the domestic monetary base. A crawling peg adjusts the fixed rate gradually by a preset rule, and a managed float lets the rate move with occasional intervention, so neither involves full reserve backing.
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