1 Foreign Exchange Foreign Exchange Foreign Exchange Foreign money, including paper money and bank...
-
date post
22-Dec-2015 -
Category
Documents
-
view
233 -
download
1
Transcript of 1 Foreign Exchange Foreign Exchange Foreign Exchange Foreign money, including paper money and bank...
1
Foreign ExchangeForeign Exchange
Foreign ExchangeForeign ExchangeForeign money, including paper money and bank deposits that are denominated in foreign currency
Foreign Exchange MarketForeign Exchange MarketA global market in which people trade one currency for another
Exchange RateExchange RateThe price of one country’s currency in terms of another country’s currency
2
Trading Trading HoursHours
3
Exchange RatesExchange Rates There is one exchange rate for every currency in
terms of every other currency. The U.S. price of a foreign good is:
U.S. price = foreign currency price x exchange rate
If a shirt in a Canadian store costs CAD25 and the U.S. to Canada exchange rate is $0.6825/CAD, then the price in U.S. dollars is
CAD25 x $0.6825/CAD = US$17.06.– It costs $17.06 of our dollars to buy 25 Canadian
dollars at a price of 68 ¼ ¢ per CAD.
4
Exchange Rates: March 10, 2003
5
Appreciation and DepreciationAppreciation and Depreciation
A currency A currency appreciatesappreciates when it buys when it buys moremore of a foreign currency.of a foreign currency.– AppreciationAppreciation of a nation’s currency makes of a nation’s currency makes
foreign goods cheaper.foreign goods cheaper.– AppreciationAppreciation Imports and Exports . Imports and Exports .
A currency A currency depreciatesdepreciates when it buys when it buys lessless of a foreign currency.of a foreign currency.– DepreciationDepreciation makes foreign goods more makes foreign goods more
expensive.expensive.– DepreciationDepreciation Imports and Exports . Imports and Exports .
6
Balance of PaymentsBalance of PaymentsA record of a country’s trade in goods, services, and A record of a country’s trade in goods, services, and financial assets with the rest of the world.financial assets with the rest of the world.
Three Major Accounts:– Current AccountCurrent Account = Merchandise + Services = Merchandise + Services + Income Earned Abroad + Unilateral Transfers+ Income Earned Abroad + Unilateral Transfers
• All international All international paymentspayments (and gifts) related to (and gifts) related to currently produced goods and services, including currently produced goods and services, including labor and capital services.labor and capital services.
– Financial AccountFinancial Account• Records the flows of financial assets and Records the flows of financial assets and
international investment into and out of a country.international investment into and out of a country.– Statistical Discrepancy AccountStatistical Discrepancy Account
Must add to Zero—the BOP must balance!Must add to Zero—the BOP must balance!– Statisical discrepancy makes up the difference.Statisical discrepancy makes up the difference.
7
Categories of current account transactions:Categories of current account transactions:
1.1. Merchandise tradeMerchandise trade---- import and export of goods import and export of goods
2.2. Service tradeService trade-- import and export of services-- import and export of services
3.3. IncomeIncome-- both investment income and -- both investment income and employee compensation employee compensation
4.4. Unilateral transfersUnilateral transfers-- gifts to and from foreigners-- gifts to and from foreigners
Current AccountCurrent Account
8
Current Account Balance
9
Current Account vs. Financial AccountCurrent Account vs. Financial Account
The balance of payments must balance—that is,
Current Account + Financial Account = 0 If there is a current account deficit, then
there must be a financial account surplus that exactly offsets that deficit.– If we buy more goods and services from
foreigners than they buy from us, we have to borrow the difference sell them our IOUs.
10
Debtors and CreditorsDebtors and Creditors
A net debtor (nation) owes more to the rest of the world than it is owed.
A net creditor (nation) is owed more than it owes.– The U.S. was an international net
creditor from the end of WWI until the mid-1980s.
– In 1985, the U.S. became a net debtor.