Foreign Exchange & Foreign Exchange Market

Foreign Exchange & Foreign Exchange Market

Chapter 5Foreign Exchange & Foreign Exchange Market

Foreign Exchange & Foreign Exchange Market

OverviewForeign Exchange & Foreign Exchange Rate Foreign Exchange Determinations Foreign Exchange Market Foreign Exchange Transactions Vocabulary Work Key Concepts Sentence Understanding Case Study Practice - Paragraph Translation - True or False - Practical Writing

Foreign Exchange & Foreign Exchange Market

Foreign Exchange & Foreign Exchange Rate

Foreign Exchange & Foreign Exchange Market

Vocabulary Workforeign exchange foreign exchange rate exchange rate quotation price currency / unit currency direct / indirect quotation method home currency / foreign currency

Foreign Exchange & Foreign Exchange Market

Key Concepts & Case Study

Foreign Exchange & Foreign Exchange Market

Foreign Exchange & Foreign Exchange RateForeign Exchange - currency issued by foreign government - to pay for imported goods - to meet foreign debt repayment obligations Foreign Exchange Rate - how much one currency is worth in terms of the other. - forex rate / FX rate

Foreign Exchange & Foreign Exchange Market

QuotationExchange Quotation - stating the number of units of a price currency that can be bought in terms of a unit currency. - e.g: Euro-United States Dollar exchange rate = 1.2 dollars per euro - price currency : dollar - unit currency : euro

Foreign Exchange & Foreign Exchange Market

QuotationDirect Quotation - Home Currency =price currency - Foreign Currency = unit currency Indirect Quotation - Foreign Currency=price currency - Home Currency = unit currency

Foreign Exchange & Foreign Exchange Market

Case StudyDirect Quotation - British pounds : home currency - US dollars: foreign currency -Foreign Exchange Rate: $1 = £ 0.625 - British pounds=price currency - US dollars = unit currency Indirect Quotation - GBP-USD Exchange Rate : £ 1= $1.6 - - British pounds=unit currency - US dollars = price currency China is using the direct quotation method. - RMB/GBP Exchange Rate: ￥ 10.0039 / £1 = 10.0039 - RMB/USD Exchange Rate: ￥6.3815 / $1 = 6.3815

Foreign Exchange & Foreign Exchange Market

Types of Exchange Rate System

Foreign Exchange & Foreign Exchange Market

Vocabulary Workfixed and floating exchange rates intervene exchange rate target sterling the European Exchange Rate Mechanism (ERM) market determined common circulation macroeconomic performance run up or down the exchange rate take prompt interventional action extent of fluctuation put economic security under menace permitted bands of fluctuation

Foreign Exchange & Foreign Exchange Market

Types of Exchange Rate SystemFixed and Floating Exchange Rates Free Floating Managed Floating Exchange Rates Semi-fixed Exchange Rates Fully-fixed Exchange Rates

Foreign Exchange & Foreign Exchange Market

Fixed and Floating Exchange RatesThe government (or the central bank acting on the government’s behalf) intervenes in the currency market so that the exchange rate stays close to an exchange rate target. Example: - Britain joined the European Exchange Rate Mechanism in Oct 1990, it fixed sterling against other European currencies. - The pound was permitted to vary against the German Mark by only 6% either side of a central target of DM 2.95. - Bank of England had not intervened in the currency markets for a long time meaning that Sterling has been marketdetermined In 2002, 12 exchange rated became one when the Euro entered common circulation throughout the Euro Zone.

Foreign Exchange & Foreign Exchange Market

Free FloatingWith floating exch

ange rates, changes in market demand and market supply of a currency cause a change in its value. Trade flows and capital flows are the main factors affecting the exchange rate. In the long run, it is the macroeconomic performance of the economy that drives the value of currency It is rare for pure free floating exchange rates to exist --most governments at one time or another seek to “manage” the value of their currency through changes in interest rates and other controls.

Foreign Exchange & Foreign Exchange Market

Managed Floating Exchange RatesDirty Floating Governments intervene in the exchange market to run up or down the exchange rate of the domestic currency according to its national economic or political interest. In practice, governments would take prompt interventional action when the extent of fluctuation put its economic security under menace.

Foreign Exchange & Foreign Exchange Market

Semi-fixed Exchange RatesThe currency is allowed to move between permitted bands of fluctuation, which makes the exchange rate is the dominant target of economic policy-making. Interest rates are set to meet the target and the exchange rate is given a specific target. Re-valuation is possible, but seen as last resort.