Chap020(2)

Chap020(2) - Chapter 20 The Foreign Exchange Market CHAPTER...

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Chapter 20 – The Foreign Exchange Market CHAPTER 20 THE FOREIGN EXCHANGE MARKET Learning Objectives: To grasp the fundamental underpinnings of the foreign exchange market. To know the distinctions between various measures of the exchange rate. To understand the roles of hedging, arbitrage, and speculation in foreign exchange markets. To comprehend the links between the current spot rate and contracts to buy or sell foreign exchange in the future. I. Outline Introduction - The Case of the Wayward U.S. Dollar The Foreign Exchange Rate and the Market for Foreign Exchange - Demand Side - Supply Side - The Market The Spot Market - Principal Actors - The Role of Arbitrage - Different Measures of the Spot Rate The Forward Market The Link between the Foreign Exchange Markets and the Financial Markets - The Basis for International Financial Flows - Covered Interest Parity and Financial Market Equilibrium - Simultaneous Adjustment of the Foreign Exchange Markets and the Financial Markets Summary II. Special Chapter Features In the Real World: Nominal and Real Exchange Rates of the U.S. Dollar In the Real World: The Big Mac Index In the Real World: Spot and PPP Exchange Rates, 1973-2005/2006 Concept Box 1: Currency Futures Quotations Concept Box 2: Currency Futures Option Quotations 20-1
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Chapter 20 – The Foreign Exchange Market III. Purpose of Chapter The purpose of this chapter is to introduce students to the nature, components, and functioning of the foreign exchange market. Special attention is focused on the links between the foreign exchange market and the money markets. IV. Teaching Tips A. Describing the relative movement of the dollar in recent years and its impact on U.S. consumers, firms, and citizens traveling abroad is a good way to generate interest in exchange rates. The opening paragraph of this chapter introduces a number of the different factors that operate on exchange rates and makes the student aware of the difficulties involved in predicting exchange rate movements. B. Students often have difficulty relating the terms “appreciation” and “depreciation” to the price of foreign exchange and the graphical analysis. It is therefore important to make them comfortable with changes in the market price and what it means in terms of the cost of foreign exchange. C. It is increasingly common to read about different exchange rate concepts in the news media. We therefore have devoted more space than is usual in texts to explaining what the various measures are and of what use they are to the international business person/traveler. If you are pressed for time, you may find it advantageous to leave this material for students to read on their own. We do, however, feel that it is important that students be exposed to these different exchange rate concepts. D.
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This note was uploaded on 11/27/2009 for the course ECON 421 taught by Professor Macphee,c during the Spring '08 term at UNL.

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Chap020(2) - Chapter 20 The Foreign Exchange Market CHAPTER...

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