{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

econ423lec18

# econ423lec18 - The Plan for Today Exchange Rates in the...

This preview shows pages 1–3. Sign up to view the full content.

7/15/2009 1 FOREIGN EXCHANGE MARKETS JULY 15 TH , 2009 Lauren Heller Econ 423, Financial Markets The Plan for Today box2 Exchange Rates in the Short Run box5 Calculating expected returns across countries box5 Deriving currency demand and supply curves. box2 Foreign Exchange Interventions box2 Homework #6 Questions Recall from last time… box2 Thanks to PPP, in the long run, changes in exchange rates are determined by the relative demand for domestic vs. foreign goods. box2 Four major factors affecting this demand: 1. Relative price levels 2. Tariffs and quotas 3. Preferences for domestic vs. foreign goods 4. Productivity Recall from last time… box2 The appreciation of a currency (%) from time t to t+1 can be calculated as: box2 Factors driving long-run exchange rate changes generally move slowly over time. box5 What about the short run? t t t E E E - + 1 Exchange Rates in the Short Run box2 Recall that an exchange rate is simply the price of domestic bank deposits in terms of foreign bank deposits. box5 One asset priced in terms of another box2 For this reason, we can use tools we’ve already learned to analyze this market. box5 Determinants of Asset Demand Exchange Rate Example box5 If he deposits them in a U.S. bank, he must convert the euros to dollars box5 The difference in Bono’s expected return depends on two things: 1. Local interest rates ( i f and i d ) 2. Expected future exchange rates. box2 Suppose Bono is deciding whether or not to deposit some of his excess euros in Ireland (at i f ) or in a U.S. bank (at i d ).

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
7/15/2009 2 Exchange Rate Example box5 If she deposits them in a foreign bank, she must convert the dollars to euros. box5 The difference in Beyonce’s expected return also depends on: 1. Local interest rates 2. Expected future exchange rates. box2 Beyoncéhas a similar problem. She can deposit her excess dollars locally, or she can deposit them in a foreign bank. R e for Bono R e for Beyoncé \$ Deposits i D + E t + 1 e - E t ( E t i D F Deposits i F ( 29 t t t F E E E i - - + e 1 Relative R e i D - i F + E t + 1 e - E t ( 29 E t i D - i F + E t + 1 e - E t ( E t Exchange Rate Example box2 We can use the following table to compare the expected returns for each musician: R e for Bono R e for Beyoncé \$ Deposits i D + E t + 1 e - E t ( E t i D F Deposits i F ( t t t F E E E i - - + e 1 Relative R e i D - i F + E t + 1 e - E t ( E t i D - i F + E t + 1 e - E t ( E t Exchange Rate Example box2 We can use the following table to compare the expected returns for each musician: Expected appreciation of the dollar relative to the euro R e for Bono R e for Beyoncé \$ Deposits i D + E t + 1 e - E t ( E t i D F Deposits i F ( 29 t t t F E E E i - - + e 1 Relative R e i D - i F + E t + 1 e - E t ( 29 E t i D - i F + E t + 1 e - E t ( E t Exchange Rate Example box2 What happens if the dollar appreciates ?
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 7

econ423lec18 - The Plan for Today Exchange Rates in the...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online