Chapter 17
the foreign exchange market
Objectives of the Chapter
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山东有什么大学This chapter deals with the nature and organization of the foreign exchange market. At its most basic, the equilibrium exchange rate can be thought of as the price that equates the international supply of and demand for a country’s money. For example, the exchange rate on the British pound (expresd as American dollars per British pound) would be determined by the supply of pounds arising from British purchas of American goods, rvices, and asts, and by the demand for British pounds arising from American purchas of British goods, rvices, and asts.
You might want to track a few of the major currencies and related commentaries in the daily listings in the financial press.
After studying Chapter 17 you should be able to identify
1. what an exchange rate is.
2. what the reciprocal of the exchange rate means.
3. the organization of the modern foreign exchange market.
4. the distinction between spot and forward exchange rates.
5. determinants of demand and supply for foreign exchange.
6. how a system of flexible foreign exchange rates works.
7. how a system of fixed foreign exchange rates works.
Important Concepts
Appreciation (depreciation): An increa (decrea) in the market price of a currency under a floating exchange rate system.
Fixed exchange rate: A rate who officially declared value is maintained by central b
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ank intervention. (Also referred to as a pegged exchange rate.)
Floating exchange rate: A rate who value is determined purely by the market forces of supply and demand, with no direct intervention by central banks. (Also referred to as a flexible exchange rate.)
成就最好的自己Foreign exchange market: A computerized communications network embracing all the major financial centers in the globe, where llers and buyers of any national money can quickly and efficiently carry out any desired currency exchange.
Foreign exchange market When a central bank buys or lls foreign exchange in order to intervention: manipulate or peg the exchange rate.
南的反义词(Foreign) exchange rate: The price of one country’s currency expresd in terms of another country’s currency. (Note that, in this text, the exchange rate is expresd in terms of domestic currency units required to purcha one unit of a foreign currency.)
Foreign exchange swap: A “package trade” in which a spot purcha of a currency is
accompanied by a forward sale of that currency, or a spot sale of a currency is accompanied by a forward purcha of that currency and payment. This transaction allows for temporary foreign exchange needs and is free of exchange risk.
Forward exchange rate: The exchange rate applicable to foreign exchange transactions agreed upon today for later delivery (usually in 30, 90, or 180 days).
Revaluation (devaluation): 成武A revaluation is an official increa in the par value of a currency under a fixed exchange rate system; a devaluation is an official decrea in the par value.
Spot exchange rate: The rate applicable to foreign exchange transactions requiring contemporaneous delivery and payment.
幼儿园园长Triangular arbitrage: The process that ensures consistency among the ts of bilateral “cross rates” of the world’s traded currencies. For example, if the British pound trades for US$2, and 100 Japane yen trade for US$1, the exchange rate between the y
en and the pound must be 200 yen per pound. Otherwi, there is an opportunity for an arbitrageur to buy a currency cheaply in one market and ll it for a higher price in another market.
Vehicle currency: A currency ud to facilitate an indirect trade between two other currencies. The U.S. dollar is often ud as a vehicle currency.
Warmup Questions
True or Fal? Explain.
1. T / F An increa in U.S. imports from France will give ri to a supply of euros in exchange for dollars.
2. T / F Central bank intervention is more prevalent under a floating exchange rate system than under a pegged exchange rate system.
伊依3. T / F If Americans suddenly refu to lend money to Mexico, we would expect the dollar to appreciate relative to the peso.
4. T / F Art appreciation cours have nothing to do with exchange rates.
5. T / F If a currency is undervalued in a fixed exchange rate system, officials from that country’s central bank will have to ll their currency to keep it pegged.
Multiple Choice
