COMMERCE 4SA3 Chapter Notes - Chapter 9-10: Foreign Exchange Spot, Foreign Exchange Risk, The Foreign Exchange

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Document Summary

The world and the canadian dollar: movement of cdn is increasingly correlated with price of dollar, known as petrocurrency . It is a secondary currency: more people trade usd, swiss franc, yen pound, euro, canadian companies operating abroad usually accept payments in usd. Interest rates reflect expectations about future inflation rates: countries with higher inflation will have higher interest rates, to compensate for decline in value of money, fisher effect: interest rate = real interest rate + inflation rate. If real interest rates are the same across countries then differences in rates between countries reflects differences in inflation. International fisher effect (ife): the spot exchange rate between two countries should change in equal amount but in opposite direction to he difference in nominal interest rates. Investors psychology and bandwagon effects: psychological factors play important role in determining short-term movements, expectations tend to become self-fulfilling prophecies.

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