Chapter 13 study guide

Chapter 13 study - Chapter 13 The Foreign Exchange Market Exchange rate price of one currency in terms of another Exchange rates are highly

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 13- The Foreign Exchange Market Exchange rate- price of one currency in terms of another. Exchange rates are highly volatile and affect the economy and daily lives. o When American dollar increases in value-foreign goods become cheaper for Americans and American goods become a premium to foreigners o When American dollar decreases- opposite affect of the increase in value Foreign exchange market- o Purpose- place where trading of currencies & bank deposits are conducted. These transactions determine the rates at which currencies are exchanged which influences the cost of purchasing foreign goods and assets o Types of exchange rates Spot transaction- predominant one involving the immediate (2 days) exchange of bank deposits Forward transaction- exchange of bank deposits at some specified future date o Importance When a county’s currency appreciates the country’s goods abroad become more expensive and foreign goods in that country become cheaper Appreciation allows consumers to buy more products Depreciation allows industries to sell more goods o Market structure No centralized location Organized through over the counter market with hundreds of dealers (mostly banks) Transactions involve bank deposits not actual cash Over $3 trillion per day Law of one price- if two countries make identical products and transportation and trade barriers are low, the price of good should be the same throughout the world no matter where it’s produced o Ex- American steel costs $100 per ton and identical Japanese steel costs 10,000 yen per ton. The exchange rate between the yen and dollar must be 100 yen per dollar so that one ton of American steel costs 10,000 yen in Japan. If the price of American steel costs more then the Japanese one
Background image of page 1

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

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/21/2011 for the course FIN 3403 taught by Professor Duong during the Spring '08 term at The University of Oklahoma.

Page1 / 3

Chapter 13 study - Chapter 13 The Foreign Exchange Market Exchange rate price of one currency in terms of another Exchange rates are highly

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online