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 / $