Econ306Lecture3 - International Economics II Lecture Notes...

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International Economics II Lecture Notes 3 Alper Duman July 9, 2009 Alper Duman International Economics II Lecture Notes 3
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Foreign Exchange Market I the Foreign Exchange Rate is simply the price of one currency in terms of another, TL per $. I The worldwide network of markets and institutions that handle the exchange of foreign currencies is known as the foreign exchange market. I The FX rate is determined by demand and supply at a given time and place I The arbitrage opportunity makes FX market very competitive, and makes sure that the FX rate will be the same everywhere. Alper Duman International Economics II Lecture Notes 3
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Both the demand side and the supply side of FX market involves three channels: 1. Current account: People use (demand and supply FX) to purchase and sell goods and services 2. Financial account: People use FX for financial and real investment purposes. 3. Sepeculation: People use FX to speculate. These channels often intermingle and constitute a highly complex web of processes. For example, ’carry trade’ is both a speculation and a legitimate financial investment transaction Alper Duman International Economics II Lecture Notes 3
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Econ306Lecture3 - International Economics II Lecture Notes...

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