ECON332 Chapter Notes - Chapter 3: Foreign Exchange Swap, Foreign Exchange Market, European Emission Standards

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9 Aug 2016
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Chapter #3
Exchange rates
Foreign exchange rates can be denoted as foreign exchange rate per
domestic currency or vice versa
Ex – 97.385 yen can be exchanged for one dollar American way
97.385 yen/\$ How much can be exchanged for Yen?
1/(97.385Y/\$) = \$0.01027/Y
876542
Exchange rates allow us to denominate the cost or price of a good or service
in a common currency.
Ex - Assume Nissan costs 2,500,000 in Japan, how much does
it cost in terms of U.S. dollars? Because \$0.01027 can be exchanged for one
yen 2,500,000Y * 0.01027\$/Y = \$25,675
Depreciation and Appreciation
Depreciation is a decrease in the value of a currency relative to another
currency.
A depreciated currency is less valuable (less expensive) and therefore
can be exchanged for (can buy) a smaller amount of foreign
currency, or fewer foreign produced goods (that are denominated in
foreign currency)
\$1/€ \$1.20/€ means that the dollar has Depreciated relative to the euro.
It now takes \$1.20 to buy one euro, so that the dollar is less valuable.
The euro has appreciated relative to the dollar: it is now more valuable.
A Nissan costs 2,500,000 x \$0.01027/= \$25,675 less expensive than
\$27,962.50 at \$0.011185/
A depreciated currency means that imports are more expensive and
domestically produced good and exports are less expensive.
A depreciated currency lowers the price of exports relative to the
price of imports.
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Depreciations in the dollar in this case means that SIMULTANEOUSLY it got
more expensive to buy yen (and thus relative to the yen the dollar depreciated
become more expensive and exports become cheaper so Canadian goods
are more competitive in the global marker and that is positive impact
on GNP or GDP
Appreciation is an increase in the value of a currency relative to another
currency.
An appreciated currency is more valuable (more expensive) and
therefore can be exchanged for (can buy) a larger amount of
foreign currency.
\$1/€ \$0.90/€ means that the dollar has appreciated relative to the
euro. It now takes only \$0.90 to buy one euro, so that the dollar is more
valuable.
The euro has depreciated relative to the dollar: it is now less valuable.
An appreciated currency is more valuable, and therefore it can
buy more foreign produced goods that are denominated in
foreign currency.
A Nissan costs 2,500,000 = \$27,962.50 at \$0.011185/
becomes less expensive \$25,000 at \$0.010/
An appreciated currency means that imports are less expensive
and domestically produced goods and exports are more
expensive.
An appreciated currency raises the price of exports relative to the
price of imports.
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Relative Price
Same currency 5\$/1 bag of apples and \$2/1 bag of oranges
Relative price: \$5/bag of apples = 2.5 bag(s) oranges / bag of apples
\$2/bag of oranges
50 (sterling pounds) / sweater * \$1.25/sterling bound
= \$62.5/sweater
\$62.5/sweater = 1.39 jeans/sweater
\$45/jeans
←  When you cross multiply you cancel out both numbers AND
currency’s
DO REST OF REALTIVE PRICE PRACTICE PROBLEMS AT HOME
Foreign Exchange Markets
Foreign exchange markets are the set of markets where foreign currencies
and other assets are exchanged for domestic ones
buy and sell deposits of currencies or other assets for investment
purposes
make international payments
most important foreign exchange markets include London, NY, Tokyo,
Frankfurt, and Singapore.
The daily volume of foreign exchange transactions was \$4.0trillion in April
2010 up from \$500 billion in 1989.
Most transactions (85% in April 2010) exchange foreign
Exchange rates are determined by the decisions of consumers, homes,
financial institutions ect.
London foreign exchange market is largest in the world!
People love to hold US dollars and Assets peoples confidence in a
currency affects its value 1.USD 2.EURO 3.YEN
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