Question : Which of the following is a factor that can contribute to exchange rate volatility?
Option 1: Political stability
Option 2: Economic growth
Option 3: financial market conditions
Option 4: Currency pegging
Correct Answer: financial market conditions
Solution : The correct answer is c) Financial market conditions
Financial market conditions can contribute to exchange rate volatility. Factors such as changes in interest rates, investor sentiment, market speculation, and economic indicators can all influence the demand and supply of currencies in the foreign exchange market, leading to fluctuations in exchange rates. For example, if there is uncertainty or instability in financial markets, it can lead to increased volatility in exchange rates as market participants react to new information or adjust their investment strategies. Political stability and economic growth can also have an impact on exchange rates, but they may not directly contribute to volatility in the same way that financial market conditions can. Currency pegging, on the other hand, refers to a fixed exchange rate system and may provide stability to the exchange rate but does not contribute to volatility.
