Standards SSEIN3ad Goals 1 I will be able to DEFINE and COMPUTE exchange rates 2 I will be able to locate amp interpret FOREX tables 3 I will be able to explain whyhow exchange rates affect purchasing power ID: 446166
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Slide1
FOREIGN EXCHANGE (FOREX)
Standards: SSEIN3a-d
Goals:
1) I will be able to DEFINE and COMPUTE exchange rates.
2) I will be able to locate & interpret FOREX tables.
3) I will be able to explain why/how exchange rates affect purchasing power.Slide2
What is an exchange rate?
Exchange rate is
the price of one country’s currency in terms of another country’s currency.
Fixed Exchange Rate:
Value of currencies is FIXED in relation to one another
Flexible/Floating Exch. Rate:
Value of currencies is based on supply and demand
-
the one used todaySlide3
Why do we have to exchange currency?
For all these transactions, there are different national currencies.
Each country must be paid in their own currency.
The buyer (importer) must exchange their currency for that of the sellers (exporter).
US sells cars to Mexico
Mexico buys tractors from Canada
Canada sells syrup to the U.S.
Japan buys Fireworks from Mexico
Slide4
Currency codes
USD
= US Dollar
CNY=Chinese Yuan
EUR = Euro
BRL= Brazilian Real
JPY = Japanese Yen
GBP = British Pound
CHF = Swiss
Franc CAD
= Canadian Dollar
AUD = Australian Dollar
NZD = New Zealand Dollar Slide5
Exchange rates
In the FOREX market we only look at two countries/currencies at a time.
Ex: US Dollars and British Pounds
We examine the price of one currency in terms of the other currency. Ex:$2 = £1
The Exchange Rate depends on which currency you are converting.
The price of one US Dollar in terms of Pounds is
1 Dollar = £1/$2 = £.5
The price of one Pound in terms of Dollars is
1 Pound = $2/£1 = $2Slide6
What happens if you need more dollars to buy one pound? (the price for a pound increases)
Ex: From $2=£1 to $5=£1
The U.S. Dollar DEPRECIATES relative to the Pound.
Depreciation
The loss of value of a country's currency with respect to a foreign currency.
More units of dollars are needed to buy a single unit of the other currency.
The dollar is said to be “Weaker”Slide7
What happens if you need less dollars to buy one pound? (the price for a pound decreases)
Ex: From $2=£1 to $1=£4
The U.S. Dollar APPRECIATES relative to the Pound.
Appreciation
The increase of value of a country's currency with respect to a foreign currency.
Less units of dollars are needed to buy a single unit of the other currency.
The dollar is said to be “Stronger”Slide8
S & d for the us dollarsSlide9
Forex Supply & demand simplified
Imagine a huge table with all the different currencies from every country
This is the Foreign Exchange Market!
Just like at a product market, you can’t take things without paying
.
If you
demand
one currency, you must
supply
your currency
.
Ex: If Canadians want Russian Rubles, the demand for Rubles in the FOREX market will increase and the supply of Canadian Dollars will increase. Slide10
Reading forex rates
Reading forex rates from a table or chartSlide11
Foreign Currency = $1 USD
Foreign Currency = 1 euroSlide12
The numbers in these columns represent the USD to the foreign currency.
EX: In May, $1.40 USD is equal to 1 British Pound (GBP)Slide13
The numbers in these columns represent the foreign currency in USD.
EX: In May, 0.71 GBP is equal to $1 USDSlide14
Forex shifters
Let’s use the example of the us dollar and the
british
poundSlide15
1. Changes in Tastes-
Ex: British tourists flock to the U.S…
Demand for U.S. dollars increases (shifts right)
Supply of British pounds increases (shifts right)
Pound-depreciates
Dollar-appreciates
2. Changes in Relative Incomes (resulting in more imports)-
Ex: US growth increase US incomes….
U.S. buys more imports…
U.S. Demand for pounds increases
Supply of U.S. dollars increases
Pound- appreciates
Dollar- depreciatesSlide16
3. Changes in Relative Price Level (Resulting in more imports)-
Ex: US prices increase relative to Britain….
U.S. demand for cheaper imports increases…
U.S. demand for pounds increases
Supply of U.S. dollars increases
Pound- appreciates
Dollar- depreciates
4. Changes in Relative Interest Rates-
Ex: US has a higher interest rate than Britain.
British people want to put money in US banks
Capital Flow increase towards the US
British demand for U.S. dollars increases…
British supply more pounds
Pound-depreciates
Dollar- appreciatesSlide17
practice
For each of the following examples, identify what will happen to the value of US Dollars and Japanese Yen.
American tourists increase visits to Japan.
The US government significantly decreases personal income tax.
Inflation in Japan rises significantly faster than in the US.
Japan has a large budget deficit that increases Japanese interest rates.
Japan places high tariffs on all US imports.
The US suffers a larger recession.
The US Federal Reserve sells bonds at high interest rates.
How do these scenarios affect exports and imports? Slide18
Practice answers
USD depreciates and Yen appreciates
USD depreciates and Yen appreciates
USD appreciates and Yen depreciates
USD depreciates and Yen appreciates
USD depreciates (Demand Falls) and Yen appreciates (Supply Falls)
USD appreciates (Supply Falls) and Yen depreciates (Demand Falls)
USD appreciates and Yen depreciates
Scenarios 1, 2, and 4 will increase US exports because US products are now relatively “cheaper”