EECS 1710 Lecture Notes - Lecture 17: Exchange Rate
24 Jun 2018
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EECS 1710 Lecture 17 Notes
Introduction
Explaining Movements in Cross Exchange Rates
The upper graph shows movements of the British pound value against the dollar and the
Swiss franc value against the dollar
The lower graph shows the cross exchange rate (pound value against the Swiss franc).
If the British pound and Swiss franc move by the same percentage against the dollar,
then there is no change in the cross exchange rate.
Review the movements from year 1 to year 2 in Exhibit 4.9.
If the British pound appreciates against the dollar by a greater percentage than the
Swiss franc appreciates against the dollar, then the British pound appreciates against
the Swiss franc.
Review the movements from year 2 to year 3 in Exhibit 4.9.
If the British pound appreciates against the dollar by a smaller percentage than the
Swiss franc appreciates against the dollar, then the British pound depreciates against
the Swiss franc.
Review the movements from year 3 to year 4 in Exhibit 4.9.
If the British pound depreciates against the dollar and the Swiss franc appreciates
against the dollar, then the British pound depreciates against the Swiss franc.
Review the movements from year 4 to year 5 in Exhibit 4.9.
A change in the equilibrium cross exchange rate over time is due to the same types of
forces identified earlier in the chapter that affect the demand and supply conditions
between the two currencies, as illustrated next.
EXAMPLE
Assume that the interest rates in Switzerland and the United Kingdom have been similar
but that today the Swiss interest rates increased while British interest rates remain
unchanged.
Document Summary
The upper graph shows movements of the british pound value against the dollar and the. Review the movements from year 4 to year 5 in exhibit 4. 9. Assume that the interest rates in switzerland and the united kingdom have been similar but that today the swiss interest rates increased while british interest rates remain unchanged. If british investors wish to capitalize on the high swiss interest rates, the result will be an increase in the british demand for swiss francs. Movements of the british pound value against the dollar and the swiss franc value against the dollar. The lower graph shows the cross exchange rate (pound value against the swiss franc). If the british pound and swiss franc move by the same percentage against the dollar, then there is no change in the cross exchange rate. Review the movements from year 1 to year 2 in exhibit 4. 9.
