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Economics 2164A/B Lecture Notes - Foreign Exchange Market, Arbitrage, Monetary Policy

100 views11 pages
apricotwombat257
29 Feb 2012
School
Western University
Department
Economics
Course
Economics 2164A/B
Professor
Russ Boyer

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Document Summary

Spot affected by only current conditions; forward less affected by current economic conditions. Spot is an immediate market, delivery in one business day. Forward is larger and involves signing a contract promising delivery at a future period. E1/2 price of 2 s currency in terms of 1 s currency. In order to measure the value of a currency in terms of a foreign currency a better approach is to use an. Exchange rate index, published by bank of canada. Uses weight values of currencies that reflect trade patterns. If canadian currency rises by 10% against each of the currencies then the index rises in value by 10% If it rises against one currency then the whole index will change by the weight of the currency times the increase. Active forward (futures) markets exist for some major currencies out to ten years.

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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?

In which market will a company arrange to receive currency for a transaction at a future date? the forwand market, the currency futures market, the arbitrage market, the forward spot market

The foreign currency exchange market is a dynamic environment whereby the mechanism that determines currency exchange rates is well understood, if not easy to control.

(A). What economic factors affect foreign currency exchange rates?

(B). What noneconomic factors affect foreign currency exchange rates?

(C). How can the currency exchange mechanism be influenced to produce stable foreign currency exchange rates?