Direct one unit of foreign currency per local

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Direct: One unit of foreign currency per local currency – foreign currency is ixed, local currency is variable (apples in a shop, $1.20AUD/USD) Indirect: One unit of local currency given in terms of foreign currency (Usually used, $0.8333USD/AUD) Buy/sell quotes Buy – The rate at which the bank (or vendor) buys back foreign exchange from people Sell – The rate at which the bank (or vendor) will sell you foreign exchange The diference between the two is called the bid-ask spread or the margin and is the proit that the bank takes from the transacion Example: 0.8/0.85 USD/AUD – This means that the bank is willing to give you 80US cents for $1 AUD and will sell that $1AUD to other people for 85US cents, therefore neing the bank 5 cents in proit for every dollar they sell Cross-rates Cross rate is the currency exchange rate between two currencies when neither are oicial currencies of the country in which the exchange rate quote is given, FX traders someimes use the term to refer to any quotes not in USD. Example: $0.8USD/AUD 80JPY/AUD Therefore the JPY/USD – 80/0.8 = 100JPY/USD The Efecive Exchange Rate Why? Distributing prohibited | Downloaded by K C ([email protected]) lOMoARcPSD|2330446
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In order to measure internaional compeiiveness in terms of foreign exchange rates with major trading partners to determine overall trading compeiiveness. What? Value of one currency in terms of more than one other currency, index of weighted averages of the nominal exchange rates of currencies of major trading partners, when a currency appreciates or depreciates, it usually does so against all other major currencies, but at diferent rates. We cannot just take the mean of these changes as it is misleading, because a country places more importance on the changes in exchange rate against major trading partners. How? Scaling Because individual bilateral exchange rates are measured in diferent units, the data is scaled and the units are removed by calculaing exchange rate relaives, measured as the raio of bilateral exchange rate at a paricular point in ime to its value in the base period (ime 0). weighing and choice of weights Because we are trying to determine internaional compeiiveness, we have to adjust the weight at which certain currency partners are held in this calculaion. This is usually done by using trade weights to determine the relevant importance of one country to the base country’s exchange rate. Export weighted for developed countries with diversiied exports, import more appropriate for developing countries with high concentraion of exports, countries with signiicant two-way trade like Australia use trade weights. Only use major trading partners for pracicality and weights should add up to 1 (therefore must use normalized weights).
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