Chapter 13 Exchange Rates and the Foreign Exchange Market: An Asset Approach
Chapter 13 ▪ Exchange Rates and the Foreign Exchange Market:An Asset Approach
Chapter organization Introduction Exchange Rates and International Transactions The Foreign Exchange Market The Demand for Foreign Currency Assets Equilibrium in the Foreign Exchange Market Interest Rates, Expectations, and equilibrium Summary Copyright C 2003 Pearson Education, Inc Slide 13-2
Copyright © 2003 Pearson Education, Inc. Slide 13-2 ▪ Introduction ▪ Exchange Rates and International Transactions ▪ The Foreign Exchange Market ▪ The Demand for Foreign Currency Assets ▪ Equilibrium in the Foreign Exchange Market ▪ Interest Rates, Expectations, and Equilibrium ▪ Summary Chapter Organization
Introduction Exchange rates are important because they enable us to translate different counties' prices into comparable terms a Exchange rates are determined in the same way as other asset prices a The general goal of this chapter is to show How exchange rates are determined The role of exchange rates in international trade Copyright C 2003 Pearson Education, Inc Slide 13-3
Copyright © 2003 Pearson Education, Inc. Slide 13-3 Introduction ▪ Exchange rates are important because they enable us to translate different counties’ prices into comparable terms. ▪ Exchange rates are determined in the same way as other asset prices. ▪ The general goal of this chapter is to show: • How exchange rates are determined • The role of exchange rates in international trade
Exchange Rates and International Transactions An exchange rate can be quoted in two ways Direct The price of the foreign currency in terms of dollars Indirect The price of dollars in terms of the foreign currency Copyright C 2003 Pearson Education, Inc Slide 13-4
Copyright © 2003 Pearson Education, Inc. Slide 13-4 Exchange Rates and International Transactions ▪ An exchange rate can be quoted in two ways: • Direct – The price of the foreign currency in terms of dollars • Indirect – The price of dollars in terms of the foreign currency
Exchange Rates and International Transactions Table 13-1: Exchange Rate Quotations CURRENCY TRADING EXCHANGGE RATE CY PER U. S 22212 9225 ao13o1313255 瑞 1 cs""s."器rR"e,"asa changer raters bsUXIUC'VII Lapre LGeGLAGq Mol]qMIqG DOM TOUG2'IUCAIs cobALIEpr CIGSLSUCG CGUIGL' IUC'OSOOI DOM TOUGe SUq COUJ- 20nLGG: LPG MSII 2LGGr onLus]'OcrOpGL s?' soon KcbnpjepGq pA bGLII221OU OL Copyright C 2003 Pearson Education, Inc Slide 13-5
Copyright © 2003 Pearson Education, Inc. Slide 13-5 Exchange Rates and International Transactions Table 13-1: Exchange Rate Quotations
Exchange Rates and International Transactions a Domestic and Foreign Prices If we know the exchange rate between two countries currencies, we can compute the price of one country s exports in terms of the other country's money Example: The dollar price of a f50 sweater with a dollar exchange rate of $1.50 per pound is(1.50 $/f)X(E50) $75 Copyright C 2003 Pearson Education, Inc Slide 13-6
Copyright © 2003 Pearson Education, Inc. Slide 13-6 ▪ Domestic and Foreign Prices • If we know the exchange rate between two countries’ currencies, we can compute the price of one country’s exports in terms of the other country’s money. – Example: The dollar price of a £50 sweater with a dollar exchange rate of $1.50 per pound is (1.50 $/£) x (£50) = $75. Exchange Rates and International Transactions
Exchange Rates and International Transactions Two types of changes in exchange rates Depreciation of home country's currency A rise in the home currency prices of a foreign currency It makes home goods cheaper for foreigners and foreign goods more expensive for domestic residents Appreciation of home country's currency A fall in the home price of a foreign currency It makes home goods more expensive for foreigners and foreign goods cheaper for domestic residents Copyright C 2003 Pearson Education, Inc Slide 13-7
Copyright © 2003 Pearson Education, Inc. Slide 13-7 • Two types of changes in exchange rates: – Depreciation of home country’s currency – A rise in the home currency prices of a foreign currency – It makes home goods cheaper for foreigners and foreign goods more expensive for domestic residents. – Appreciation of home country’s currency – A fall in the home price of a foreign currency – It makes home goods more expensive for foreigners and foreign goods cheaper for domestic residents. Exchange Rates and International Transactions
Exchange Rates and International Transactions Exchange Rates and relative prices Import and export demands are influenced by relative prices Appreciation of a countrys currency Raises the relative price of its exports Lowers the relative price of its imports Depreciation of a country's currency Lowers the relative price of its exports Raises the relative price of its imports Copyright C 2003 Pearson Education, Inc Slide 13-8
Copyright © 2003 Pearson Education, Inc. Slide 13-8 ▪ Exchange Rates and Relative Prices • Import and export demands are influenced by relative prices. • Appreciation of a country’s currency: – Raises the relative price of its exports – Lowers the relative price of its imports • Depreciation of a country’s currency: – Lowers the relative price of its exports – Raises the relative price of its imports Exchange Rates and International Transactions
Exchange Rates and International Transactions able 13-2: $/ Exchange Rates and the Relative Price of American Designer Jeans and British Sweaters Exchange rate(S/E) 1.25 150 1.75 Relative price (pairs of jeans/sweater) 1.39 1.67 1.94 Note: The above calculations assume unchanged money prices of $45 per pair of jeans and f50 per sweater Copyright C 2003 Pearson Education, Inc Slide 13-9
Copyright © 2003 Pearson Education, Inc. Slide 13-9 Exchange Rates and International Transactions Table 13-2: $/£ Exchange Rates and the Relative Price of American Designer Jeans and British Sweaters
The Foreign Exchange Market Exchange rates are determined in the foreign exchange market The market in which international currency trades take place The actors The major participants in the foreign exchange market are Commercial banks International corporations Nonbank financial institutions Central banks Copyright C 2003 Pearson Education, Inc Slide 13-10
Copyright © 2003 Pearson Education, Inc. Slide 13-10 The Foreign Exchange Market ▪ Exchange rates are determined in the foreign exchange market. • The market in which international currency trades take place ▪ The Actors • The major participants in the foreign exchange market are: – Commercial banks – International corporations – Nonbank financial institutions – Central banks