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Foreign-Exchange Market
Foreign-exchange market
Organizational setting
Within which individuals, businesses,
governments, and banks
Buy and sell foreign currencies and other
debt instruments
Foreign-Exchange Market
Foreign-exchange market
Transactions between commercial
banks and their commercial
customers
Domestic interbank market conducted
through brokers
Active trading in foreign exchange
with banks overseas
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Reading Foreign-Exchange
Quotations
Exchange rate
Price of one currency in terms of another
Number of units of foreign currency
required to purchase one unit of domestic
currency
Is determined where demand for the
currency equals its supply
Currency depreciation
It takes more units of a nations currency
to purchase a unit of some foreign
currency
2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except
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Reading Foreign-Exchange
Quotations
Currency appreciation
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Exchange-Rate Determination
Exchange rate in a free market
Determined by both supply and demand
conditions
Changes in demand and supply cause
fluctuations in exchange rate
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GLOBALIZATI
ON
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Exchange-Rate Determination
Supply of foreign exchange
Amount of foreign exchange that will
be offered to the market
At various exchange rates, all other
factors held constant
FIGURE
11.1
Exchange-rate determination
The equilibrium exchange rate is established at the point of intersection of the supply
and demand schedules of foreign exchange. The demand for foreign exchange
corresponds to the debit items on a nations balance-of-payments statement; the
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for
use as permitted
in a license
distributed
with a certain product
or credit
service oritems.
otherwise on a passwordprotected
supply
of foreign
exchange
corresponds
to the
website for classroom use
Exchange-Rate Determination
Increase in the demand for pounds
Shift rightward
The dollar will depreciate against the
pound
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Exchange-Rate Determination
Increase in the supply of pounds
Rightward shift
The dollar appreciate against the
pound
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TABLE 11.6
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if increasing
Dollar appreciation relative to the
currencies of the other nations in the
index
Loss of competitiveness for the U.S.
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14
15
Arbitrage
Exchange arbitrage
Simultaneous purchase and sale of a
currency
In different foreign-exchange markets
To profit from exchange-rate differentials
in the two locations
16
Foreign-Exchange Market
Speculation
Speculation
Stabilizing speculation
Goes against market forces by
moderating or reversing a rise or fall in a
currencys exchange rate
Useful function for bankers and
businesspeople, who desire stable
exchange rates
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Foreign-Exchange Market
Speculation
Destabilizing speculation
Goes with market forces by
reinforcing fluctuations in a currencys
exchange rate
Can disrupt international transactions
High cost of hedging impeding
international trade
Disrupt international investment activity
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TRADE
CONFLICTS
Depreciating dollar
Purchase foreign currency
Purchase bonds denominated in a
foreign currency
Purchase stocks of foreign
corporations, denominated in foreign
currencies
Savings account denominated in a
foreign currency
Variety of currency derivatives
2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected
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19
2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected
website for classroom use
20
2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected
website for classroom use
21