Lecture 14&15 - Exchange Rates and the Exchange Rate System

Lecture 14&15 - Exchange Rates and the Exchange Rate System...

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Exchange Rates and the Exchange Rate System Exchange Rate : Price of that currency in the terms of another currency (Canada usually in terms with the US) Currency Appreciation : Our currency rises in price, comparing with another country’s currency Currency Depreciation : Our currency falls in price, comparing with another country’s currency Reasons for acquiring foreign currency: 1. Trade between goods and services 2. Investment purposes 3. Interest rate arbitrage (profiting from differences in the interest rates) 4. Speculation (based on assumption, at best educated guessing) Foreign Exchange Model (Ie. exchange rate between the pound and Canadian dollars) Demand for Pounds – when Canadian firms import goods from the UK it creates a demand for pounds (see notes for graphical explanation) - Decrease in the price of the pound – which will make the imports from the UK more expensive in terms of Canadian dollars Exchange Rate Price in UK pounds Price in CDN $ $3.00 = 1 pound 1 pound $300 $2.00 = 1 pound 1 pound $200 - The higher the price of the pound, the lower the quantity of imports, which results in the lower demand of the pound
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This note was uploaded on 04/18/2008 for the course ECONOMICS ECN 220 taught by Professor Jolly during the Winter '08 term at Ryerson.

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Lecture 14&15 - Exchange Rates and the Exchange Rate System...

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