Lesson_50_Introduction to the Foreign Exchange Market

Lesson_50_Introduction to the Foreign Exchange Market -...

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1 Lesson 50 1 Introduction to the Foreign Exchange Market Different countries use different currencies In order to undertake international transactions, currency from one country has to be traded for currency of another These trades take place in the FX market This lesson introduces institutions and scope of market Lesson 50 2 An exchange rate is the price of one currency in terms of another e.g., 117 yen per dollar e.g., $1.90 per pound sterling The price of a British pound is $1.90 The price of a dollar is 117 yen Lesson 50 3 From U.S. perspective, exchange rate can be quoted as dollars per unit of foreign currency, or foreign currency units per dollar The latter is known as “European” terms or “indirect” terms (even when the other currency is not European) The former is known as “American” terms or “direct” terms
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2 Lesson 50 4 Exchange rates between most major currencies (U.S. dollars, British pounds, European euros, Japanese yen, Swiss francs) change frequently…even minute to minute A currency is said to appreciate when its price increases in terms of another currency, and depreciate when its price decreases in terms of another currency Lesson 50 5 Because an exchange rate can be quoted in one of two ways, saying that “the exchange
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This note was uploaded on 09/14/2009 for the course ECON 340 taught by Professor Leidholm during the Summer '08 term at Michigan State University.

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Lesson_50_Introduction to the Foreign Exchange Market -...

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