MGEC61H3 Chapter 13: Chapter 13 Notes
19 Dec 2010
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Chapter 13: exchange rate and the foreign exchange market: an asset approach. Definitions: exchange rate: the price of one currency in terms of another, depreciation: a decrease in the value of a currency, appreciation: an increase in the value of a currency. If edc/fc , then dc depreciates and fc appreciates: foreign exchange market: the market in which international currency trades take place. Spot exchange rates (edc/fc): today"s exchange rate: forward exchange rates: the exchange rate that is contracted today for the exchange of currencies at a specified date in the future. Forward discount and forward premium: expected exchange rates ( ): the exchange rate that agents are expected to prevail in the future. For each dc i invest in the dc denominated deposit, i get (1 + r) units of. example: if r = 6%, the amount of dc received a year later is: Invest in fc denominated deposit: convert dc into fc: each dc, i get.
