MGMT1101 Lecture Notes - Lecture 7: Money Market Account, Portfolio Investment, Exchange Rate
19 May 2018
School
Department
Course
Professor
Chapter 7 – Exchange Rate
Foreign Exchange Market: Market for converting the currency of one country into another nation.
- Currencies represent national sovereignty
- Demand for a currency – derived fro foreig dead for the coutr’s g/s or assets
- Supply of a currency – derived from local demand for foreign g/s or assets
- Inflation, Interest rates, Market psychology
Exchange rate: Rate at which one currency is converted into another/ the number of units of one
currency needed to purchase one unit of the other currency
- Appreciation: Increase in value of currency (measured by amount of foreign currency it can
buy)
- Depreciation: Decrease in value of currency
- Nominal Exchange Rate: the rate at which a person can trade the currency of one for
another
➢ AU$1 = US$.78
- Real Exchange Rate: the rate at which a person can trade the g/s of one country for another
g/s
➢ (Nominal exchange rate x Domestic price) /Foreign Price
➢ OR (Nominal exchange rate x Price index of domestic g/s) / Price index of foreign g/s
- WHY IMPLEMENT EXCHANGE RATE POLICY?
➢ Control inflation
➢ Enhance international competitiveness for domestic industries
➢ Correct BOP (balance of payments) deficit
➢ Limit impact on economy of an external financial crisis
Internal balance: when economy operates at full capacity with near-full employment
and price stability
External balance: when int BOP is such that foreign debt obligations into the future are
sustainable for a country/ its trading partners
Foreign Exchange Risk: Risk that changes in exchange rates will hurt the profitability of a business
deal.
Functions of Forex Market: To convert currencies from one to another; and to provide some hedge
or insurance against Foreign Exchange Risk.
- Currency Conversion: (4 main types of uses)
➢ The payments a business receives for its exports – using the funds require them to first
convert to their home currency)
➢ Use forex markets to convert currencies when they must pay a foreign entity for its g/s –
Imports
➢ *Conert to host country’s currency hen they undertake FDI (or for portfolio
investment) – Ivestig i aother coutr’s oe arket accout to gai ore
interest rate
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Foreign exchange market: market for converting the currency of one country into another nation. Demand for a currency derived fro(cid:373) foreig(cid:374) de(cid:373)a(cid:374)d for the cou(cid:374)tr(cid:455)"s g/s or assets. Supply of a currency derived from local demand for foreign g/s or assets. Exchange rate: rate at which one currency is converted into another/ the number of units of one currency needed to purchase one unit of the other currency. Appreciation: increase in value of currency (measured by amount of foreign currency it can buy) Nominal exchange rate: the rate at which a person can trade the currency of one for another. Real exchange rate: the rate at which a person can trade the g/s of one country for another g/s. (nominal exchange rate x domestic price) /foreign price. Or (nominal exchange rate x price index of domestic g/s) / price index of foreign g/s. Limit impact on economy of an external financial crisis.
