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FRM Part I · FRM Exam Part I · Foreign Exchange Markets

Which exchange rate regime allows the currency to be determined mainly by market supply and demand, while the central bank occasionally intervenes to smooth excessive volatility without committing to a target level?

This describes a dirty or managed float. Market forces set the exchange rate, and the central bank intervenes at its discretion to reduce volatility without committing to a specific level. Pegs, currency boards and dollarization all involve firm commitments to a fixed value or foreign currency.

  1. ACurrency board
  2. BConventional fixed peg
  3. CDirty (managed) floatCorrect
  4. DDollarization

Explanation

A managed or dirty float lets the market set the rate, with discretionary intervention to dampen volatility and no announced target path. A currency board and a fixed peg commit to a set rate, and dollarization replaces the domestic currency entirely with a foreign one.

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