Foreign Exchange Market - PowerPoint PPT Presentation

1 / 12
About This Presentation
Title:

Foreign Exchange Market

Description:

In past, exchange rates were fixed, not the market sets the price in most countries ... Exchange rate is the number of units of a foreign currency that can be ... – PowerPoint PPT presentation

Number of Views:67
Avg rating:3.0/5.0
Slides: 13
Provided by: jimandj
Category:

less

Transcript and Presenter's Notes

Title: Foreign Exchange Market


1
Chapter 9
  • Foreign Exchange Market

2
Globalization
  • Globalization of US economy (indeed all
    economies) have led to increased importance of
    foreign exchange
  • enormous market! Important market.
  • In past, exchange rates were fixed, not the
    market sets the price in most countries

3
Definition
  • Exchange rate is the number of units of a foreign
    currency that can be acquired with one unit of
    domestic money.
  • Example yen/dollar exchange rate is 100. This
    means that a US dollar can be exchanged for 100
    yen

4
Foreign exchange continued
  • Remember Exchange rate is the number of units of
    a foreign currency that can be acquired with one
    unit of domestic money.
  • What does it mean to have the dollar fall?
  • That the dollar cannot be exchanged for as many
    foreign units. Thus a move to 90 yen would be a
    decline in the US dollar.

5
Simple example
  • Suppose yen/dollar exchange rate is 100. You
    want to buy a Walkman that Sony is selling for
    5000 yen.
  • How much would this cost you in dollars?
  • US dollar price
  • foreign price/exchange rate
  • 5,000/100 50

6
Walkman example continued
  • Suppose now the US dollar goes up in value
    relative to the Yen. The new exchange rate is
    110.
  • Same price in yen 5000
  • new price in dollars
  • 5000/11045.45

7
Walkman example continued
  • What if the dollar falls?
  • Same price in yen 5000
  • new price in dollars is 90 yen per dollar
  • 5000/9055.45

8
Effects of changing fore-ex rates
  • Movements in the foreign exchange markets have
    effects on the product markets
  • Now suppose a US manufacturer of portable stereos
    is in the market and they make a identical
    product to the Walkman.
  • Which do you buy?

9
Foreign exposure
  • US firm sells their product for 50.
  • As US dollar falls, they
  • a. could raise their prices
  • b. maintain their prices and sell more product
    since it is now RELATIVELY cheaper.
  • Either way the value of the US firm should
    increase

10
Effects of changing Fore-Ex prices
  • This change in value tied to fore-ex markets has
    been an important new risk facing all firms. No
    longer must you be selling internationally, even
    domestic firms have fore-ex exposure
  • This has led to many new financial products and
    strategies to reduce exposure.

11
What causes currency fluctuations?
  • Largely a function of changes in demand for
    currency. Example changes in Demand for US
    dollars.
  • Function of foreign demand for US goods,
    services, and securities.
  • Thus by changing interest rates, central bankers
    can change demand for currency.
  • (see FT article on Japan)

12
Suggested problems
  • 11-15
Write a Comment
User Comments (0)
About PowerShow.com