Foreign Exchange

							Foreign Exchange
Exchange rate
   The price of one currency in
    terms of another currency
Exchange Rates
   Exchange rates are expressed as
    the number of units of one type of
    currency needed to buy one unit of
    another currency

   It used to take 8 francs to buy $1,
    so the exchange rate was 8f/$
Determinants of Exchange
Rates
 1. Investment
 2. Payment for Imports and

  Exports
 3. Travel

 4. Speculation
Brief History of Foreign
Exchange
   By the 1880’s most
    currencies were
    backed by gold. This
    gold standard set a
    price for gold in all
    currencies.
   This meant that the
    money supply had
    to be equal to the
    gold supply
End of the Gold Standard
   World War One ended the gold
    standard in many countries.
   No one wants to trade gold in a national
    crisis.
   England suspended the conversion of
    the pound into gold in 1933, and the
    price of gold went from $20.67 per
    ounce in 1900 to $35 in the US.
Bretton Woods
   The Bretton Woods Agreement set the
    price of each currency in gold.
   The International Monetary Fund (IMF)
    was created to help nations with
    emergency loans of currency.
The End of the US Gold
Standard
   IN the 1960’s as trade increased,
    currency grew faster than gold.
   1971, Nixon ended dollar to gold
    conversion, canceling the Bretton
    Woods Agreement.
   Gold became just another commodity,
    and the price of gold rose to over $300
    per ounce
Currency Float
   Since 1973, currencies have been
    traded in an International Currency
    Market
   Sometimes governments will intervene
    in the market, buying or selling
    currencies to avoid a financial crisis.
Exchange rates
   Now Exchange rates are determined by
    supply and demand
Changes in price
   Let’s say that the Japanese Yen is
    trading for 120Y/$.
   Put another way it takes 120 Y to buy
    $1
   If the Yen price of the dollar changes,
    we say the yen either appreciates or
    depreciates.
Appreciation
   If the yen price of dollar increases, from
    120Y/$ to 130Y/$, then the dollar has
    appreciated. The dollar “buys more
    yen.”
Depreciation
   If the yen price of dollar goes from
    120Y/$ to 110Y/$, then the dollar has
    depreciated, as the dollar now buys
    fewer yen.
Appreciate/Depreciate
   Of course if the dollar appreciates, the
    yen depreciates.
   If the dollar depreciates the yen
    appreciates.
Determining prices of goods
 If we know the dollar price of a good, we can
  use the exchange rate to calculate the price
  of the good in another currency.
 The equation we use:

Dollar Price X exchange rate = foreign price

Use the foreign currency price of the dollar rate
An example
   A Ford Ranger costs $10,000 in the US.
    How much does the truck cost in
    Canada if the exchange rate is
    1.50Can/$ ?
   $10,000 x 1.50CD/$ =
   15,000 Canadian dollars
Who wants to be a Millionaire?
   How many US $ would you need to be
    a millionaire in the following countries?
   Japan 120 yen / $
   Chile 688 peso / $
   South Korea 1203 won / $
   Venezuela 1401 bolivar / $