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Exchange Rate: the price of one
currency in terms of another.
Exchange Rates
Exchange rates affect our economy and
each of us because:
1) When the dollar appreciates (strong
dollar), the dollar becomes more
valuable relative to other currencies.
Exchange Rates
Exchange rates affect our economy and
each of us because:
1) When the dollar appreciates (strong
dollar), the dollar becomes more
valuable relative to other currencies.
Foreign products become cheaper to us.
Exchange Rates
Exchange rates affect our economy and
each of us because:
1) When the dollar appreciates (strong
dollar), the dollar becomes more
valuable relative to other currencies.
Foreign products become cheaper to us.
U.S. products become more expensive
overseas.
Exchange Rates
Exchange rates affect our economy
and each of us because:
Exchange Rates
Exchange rates affect our economy
and each of us because:
2) When the dollar depreciates
(weak dollar), the dollar falls in
value relative to other currencies.
Exchange Rates
Exchange rates affect our economy
and each of us because:
2) When the dollar depreciates
(weak dollar), the dollar falls in
value relative to other currencies.
Foreign products become more
expensive for us.
Exchange Rates
Exchange rates affect our economy
and each of us because:
2) When the dollar depreciates
(weak dollar), the dollar falls in
value relative to other currencies.
Foreign products become more
expensive for us.
U.S. products become cheaper
overseas.
Spot Exchange Rates
£/$ Supply of
(price of Dollars
dollars)
Quantity of dollars
What Determines Exchange Rates?
£/$ Supply of
(price of Dollars
dollars)
Quantity of dollars
What Determines Exchange Rates?
Another example:
Another example:
Another example:
Quantity of dollars
What Determines Exchange Rates?
Supply of
Dollars
¥/$
(price of
dollars)
Quantity of dollars
Foreign Exchange Markets
Different exchange rates are used for
different types of transactions:
1) Spot Exchange Market: deals with
currency for immediate delivery.
The exchange rate used in spot transactions
is called the spot exchange rate.
If you need 500,000 francs to buy imports,
and the spot exchange rate is .1457, you
would pay your bank $72,850.
Foreign Exchange Markets
=[ ] [ ] x 100
premium forward - spot 12
or discount spot n
Forward-Spot Differential
For our example,
Forward-Spot Differential
For our example,
=[ ] [ ] x 100
premium forward - spot 12
or discount spot n
Forward-Spot Differential
For our example,
=[ ] [ ] x 100
premium forward - spot 12
or discount spot n
=[ .1476 - .1457
.1457
] [ ] x 100
12
6
Forward-Spot Differential
For our example,
=[ ] [ ] x 100
premium forward - spot 12
or discount spot n
=[ .1476 - .1457
.1457
] [ ] x 100
12
6
Risks
Business Risk - firms must be aware
of the business climate in both the
U.S. and the foreign country.
Financial Risk - not much difference
between financial risks of foreign
operations and those of domestic
operations.
Direct Foreign Investment
Risks
Political Risk - firms must be aware
that many foreign governments are
not as stable as the U.S.
Exchange Rate Risk - exchange rate
changes can affect sales, costs of
goods sold, etc. as well as the firm’s
profit in dollars.