ECON 1010 Chapter Notes - Chapter 25: Foreign Exchange Market, The Foreign Exchange, Currency Appreciation And Depreciation

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yellowbat880

25 Jul 2017

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25 the exchange rate and the balance of payments. The exchange rate the price at which one currency is exchanged for another. Demand for cad dollar in the foreign exchange market: the exchange rate for the cad dollar (the price which cad dollar exchanges for another currency) If demand for cad exports inc, demand for cad dollars inc: people will be buying more cad dollars to buy cad exports, cad interest rate relative to foreign interest rates (canadian interest rate differential (cird): If cird inc, demand for cad dollars inc: because cad interest rate rises relative to foreign interest rate, people buy more cad assets rather than keeping or buying foreign assets, the expected future exchange rate. If expected exchange rate for the cad dollar inc, demand will inc. Increases profit people expect to make holding cad dollars (buy cad dollars) Supply of cad dollar in the foreign exchange market: the exchange rate.

Related Questions

Foreign exchange markets make it possible for trade to be enacted between countries without lengthy negotiations on trade terms. The exchange rate mechanism is a relatively stable process whereby different currencies can be exchanged in an orderly manner in conformity to the rules of currency exchange rates. Factors, such as the relative inflation and unemployment rates between the trading partners, affect the value of each country's currency in relation to the other countries' currency. The country with higher inflation and unemployment will have the lower valued currency.

(A.) Why is the foreign currency exchange market important to a business?

(B.) What is the benefit of the foreign currency exchange market to the U.S. company?

(C.) If the U.S. currency is decreasing versus other currencies of countries it trades with, how will that affect the U.S. company? If the reverse is true, how will that affect the US company?

orchiddonkey965

Just as with the price of a good, the price, or exchange rate, of a currency is determined by supply and demand. However, rather than using a traditional supply and demand analysis as shown in Marthinsen, currency traders often consider whether foreign funds will flow into or out of a country as a result of a particular economic circumstance. If foreigners wish to make domestic purchases or investments, foreign currency must first be exchanged for the domestic currency. Thus, foreign funds flowing into a country increase the demand for the domestic currency and it appreciates. Funds flowing out reverse this process leading to depreciation of the domestic currency. In the table, place an X to indicate whether each economic condition will cause foreign funds to flow in or out of the country and whether the domestic currency will appreciate or depreciate.

Domestic circumstance	Funds flow in	Funds flow out	Currency appreciates	Currency depreciates
Real interest rates are higher than in other countries
Risk of civil war
Business taxes are raised above world average
Expected stock market returns are better than elsewhere
Inflation increases
A large deposit of rare earth minerals is discovered
Rapidly growing manufacturing sector imports more foreign raw materials
World commodity prices (such as oil or grain) fall in a country that is a major commodity exporter
GDP increases
PI falls

orchidmosquito970

Need a discussion post on the following

A) Go to the X-Rates Web site (http://x-rates.com) and find the current exchange rate for the US Dollar (USD) and Mexico currency.

B) Then, from the icons below the currency selection boxes, select Graphs and then select 1 year based on the 12 months of data, which currency is appreciating (gaining value) and which is depreciating (losing value)? Remember, it can do both in a year.

C) Now go to the CIA World Factbook and find out what goods and products Mexico exports. Since most all of the goods that you buy are either imported or contain inputs from other countries, what do the trends in the exchange rates you examined tell you about the prices you can expect to pay for goods imported from Mexico or for products that use inputs from that country (i.e., the exports of your country)?

D) 1. On the discussion board, share your findings of whether Mexico's currency is appreciating or depreciating relative to the US Dollar.

2. What do you think this means for American imports from Mexico?

3. What do you think it means for American exports to Mexico?

orangeseal823

ECON 1010 Chapter Notes - Chapter 25: Foreign Exchange Market, The Foreign Exchange, Currency Appreciation And Depreciation

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