Exchange rates.docx - Exchange rate Chapter 4 4.1.1 Spot exchange rate Nominal spot exchange rate of the Canadian dollar in terms of a foreign currency

Exchange rates.docx - Exchange rate Chapter 4 4.1.1 Spot...

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Exchange rate Chapter 4 4.1.1 Spot exchange rate Nominal spot exchange rate of the Canadian dollar in terms of a foreign currency o Price of CAD in foreign currency Nominal o In terms of money – opposite is real in terms of goods and services Spot o For immediate delivery – opposite is forward – future delivery Forward exchange rate o Nominal forward exchange rate is the price of a unit of a foreign currency delivered in the future Foreign currency reserves o Stocks of assets, denominated in foreign currencies (Usually – bonds issued by foreign governments) held by the central bank 4.2 exchange rate regimes Appreciation – increase in value of the currency Depreciation – decrease in the value of the currency 4.2.1 Flexible exchange rates Determined by forex Higher the demand for Canadian goods, services, assets (both physical and financial), higher the demand for Canadian dollars. Foreign demand for goods and services depends on real exchange rate Foreign and Canadian demand for physical assets depend on real exchange rate Demand for Canadian paper assets depends negatively on nominal exchange rate. Ceteris paribus assumption - changes in real exchange rate are same as nominal Transactions through intermediaries o Usually done through banks o
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  • Fall '13
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