Chapter 9 Student P10 MGT 302

Chapter 9 Student P10 MGT 302 - Chapter Nine The Foreign...

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Chapter Nine The Foreign Exchange Market
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Key Concepts: The factors that impact exchange rates The micro and macro implications of exchange rate changes Approaches for forecasting exchange rates Techniques to protect against exchange rate risk
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Exchange Rates An exchange rate is the rate at which one currency is converted into another. $1 = €0.6936 To calculate the reciprocal exchange rate, divide the known rate into 1.0. €1 = $1.44 (1.0/.6936)
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Currency Appreciation and Depreciation The market forces of supply and demand cause currencies to gain or lose value. A currency is said to appreciate when it increases in value compared to another currency; the currency can be used to purchase more foreign currency units than it could in the past. A currency is said to depreciate if it declines in value compared to another currency; a given quantity of the currency can purchase fewer foreign currency units than it could in the past.
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Currency Devaluation and Revaluation Currency devaluations and revaluations are the result of government actions including the changing of fixed exchange rate systems or the buying and selling of foreign exchange reserves. Devaluation is the deliberate downward adjustment in the exchange rate. Revaluation is an upward change in the currency’s value.
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Exchange Rates: March 1, 2010 Euro British Pound Japanese Yen Canadian Dollar Australian Dollar 1 USD .7428 .6707 89.225 1.0468 1.1146 52 Week Range .6603 - . 8028 .5868 - .7324 85.365 – 101.480 1.0207 - 1.3068 1.0631 - 1.5911 Yahoo Finance. Accessed 3-1-2010.
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Spot Exchange Rate: the exchange rate at which a foreign exchange dealer would convert one currency into another currency on that day Forward Exchange Rate: the exchange rate at which a foreign exchange dealer will agree to convert one currency into another currency on a specific date in the future
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Forward Exchange Rates Selling on a Discount: foreign exchange dealers expect the home currency to depreciate; a USD could buy more of a foreign currency today than in the future at
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Chapter 9 Student P10 MGT 302 - Chapter Nine The Foreign...

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