365 Topic2 - ECO365 Topic 2 Exchange Rate and Foreign...

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Exchange Rate and Foreign Exchange Market ECO365 Topic 2
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Overview ECO365 2 1. Exchange Rate Essentials Defining the Exchange Rate Appreciations and Depreciations Multilateral Exchange Rates 2. Exchange Rates in Practice Exchange Rate Regimes: Fixed Versus Floating Recent Exchange Rate Experiences
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Overview ECO365 3 3. The Market for Foreign Exchange The Spot Contract Transaction Costs Derivatives Private Actors Government Actions 4. Arbitrage and spot exchange rates Arbitrage with Currencies Cross Rates and Vehicle Currencies 5. Arbitrage and interest rates Riskless Arbitrage: Covered Interest Parity (CIP) Risky Arbitrage: Uncovered Interest Parity (UIP)
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Exchange Rate : Definition ECO365 4 Definition : Exchange rate is the price of one (Foreign) currency expressed in terms of another (Home) currency. E 1/2 will denote the exchange rate in units of country 1 currency per units of country 2 currency. Example : If the U.S. dollar price of one U.K. pound sterling (£1) is $1.85, then E $/£ = 1.85.
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Exchange Rate : Depreciation ECO365 5 Definition : When the Home currency depreciates, the price of the Foreign currency in terms of the Home currency goes up. A more valuable Foreign currency. Exports are cheaper , imports are dearer . Example : Exchange rate changes from 1.5 CAD per EUR to 2 CAD per EUR => CAD depreciates against EUR.
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