Lesson_55_Supply and Demand for Foreign Currency

Lesson_55_Supply and Demand for Foreign Currency - Supply...

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1 Lesson 55 1 Supply and Demand for Foreign Currency Exchange rate is a price The FX market is highly competitive As in any competitive market, price is determined by supply and demand This lesson is an overview of the determinants of supply and demand for FX Lesson 55 2 Start by figuring out how to label graph: $/£ Q £ €/$ Q $ D £ S £ D $ S $ Market for £ Market for $ Lesson 55 3 What generates a demand for pounds (or dollars, or euros, or yen, or…)? Pounds are demanded for the things they can buy They can buy British goods, services, assets An American importer of Jaguars wants pounds to pay for the cars
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2 Lesson 55 4 American insurance company wants pounds to buy British treasury bonds American athlete wants pounds to pay insurance premium on policy issued by Lloyd’s of London When pounds get cheaper, the things they buy get cheaper (in terms of dollars) also Lesson 55 5 E.g., suppose a Jaguar is priced at £30,000 At an exchange rate of $2.00 per pound, this is $60,000 But at $1.80 per pound, this is only $54,000
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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_55_Supply and Demand for Foreign Currency - Supply...

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