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Tuesday, May 17, 2016

Foreign exchange - unit 7

Unit 7 

Mechanics of Foreign Exchange
  • The buying and selling of currency
  • Any transactions that occurs in the Balance of Payments necessitates foreign exchanges
  • The exchange rate is determined in the foreign currency market
Changes in Exchange Rates
  • Exchange rates (e) are a function of the supply and demand for currency
  • An increase in supply of a currency will decrease exchange rate of currency
  • A decrease in supply of currency will increase exchange rate of a currency
  • An increase in demand for a currency will increase the exchange rate of a currency
  • A decrease in demand for a currency will decrease the exchange rate of a currency
Appreciation and Depreciation
  • Appreciation of a currency occurs when the exchange rate of that currency increases
  • Depreciation of a currency occurs when the exchange rate of that currency decreases
Exchange Rate Determinants
  • Consumer Tastes
  • Relative Income
  • Relative Price Level
  • Speculation
Exports & Imports
  • Exchange rate is a determinant of both exports and imports
  • Appreciation of the dollar causes American goods to be relatively more expensive and foreign goods to be relatively cheaper thus reducing exports and increasing imports
  • Depreciation of the dollar causes American goods to be relatively cheaper and foreign goods to be relatively more expensive thus increasing exports and reducing imports
Floating/Flexible Rates
  • Based upon supply and demand of that currency vs other currencies
  • Very sensitive to business cycle and provides options for investments
Fixed Rate
  • Based on a country's willingness to distribute currency and to control the amount 

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