ECO3701 Lecture Notes - Lecture 11: Exchange Rate, Arbitrage, Purchasing Power Parity
Document Summary
The spot rate is the exchange rate now. It is actually two rates, a buying (bid) rate and a selling (ask) rate. Bid is the buy rate for foreign currency and it will always be lower than the ask rate; the spread provides the fee for service. Bid/ask spread % = ask rate - bid rate x 10 ask rate. %s = . 02 x 100 = . 0175 x100. Spread = 1. 75: bid/ask spread is normally larger for: less frequently traded and/or more volatile currencies, small lots tourists and retail, cross exchange rate are also widely available, note the role of arbitrage. A rightward shift in the demand curve for pesos raises the dollar price of pesos, implying an appreciation of the peso and a depreciation of the dollar. A rightward shift in the supply curve of pesos lowers the dollar price of pesos, implying a depreciation of the peso and an appreciation of the dollar.
