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Exchange rates

Exchange rates. What you will learn. Exchange rates, appreciation and depreciation. Effects of currency movements. Depreciation. Appreciation. The linked exchange rate system. Take this challenge. xample:. Exchanges rates, depreciation and appreciation.

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Exchange rates

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  1. Exchange rates

  2. What you will learn ... Exchange rates, appreciation and depreciation Effects of currency movements Depreciation Appreciation The linked exchange rate system Take this challenge

  3. xample: Exchanges rates, depreciation and appreciation The exchange rate of a currency is the price of that currency in terms of ________________. another currency An exchange rate of CAD1:HKD5.63 means that the price of one Canadian dollar is HKD5.63.

  4. xample: Exchanges rates, depreciation and appreciation Appreciationrefers to the ________ in the exchange value of a currency in terms of another currency. increase Depreciationrefers to the ________ in the exchange value of a currency in terms of another currency. decrease Suppose the exchange rate of the Canadian dollar (CAD) changes from CAD1:HKD5.63 to CAD1:HKD5.69. the Hong Kong dollar has appreciated / depreciated against the Canadian dollar.

  5. Price: HKD100 Exchange rate Price in CAD CAD1:HKD5.0 CAD_____ Hong Kong’s exports Effects of currency depreciation 1. Effects on price and volume of exports 20 CAD1:HKD5.5 CAD_____ 18.18 When the HKD depreciates against the CAD, Hong Kong’s export price will increase / decrease. Hong Kong’s volume of exports will increase / decrease.

  6. Effects of currency depreciation 2. Effects on export revenue When the HKD depreciates against the CAD, Hong Kong exporters’ total revenue from exports (in terms of CAD) may increase or decrease, depending on the __________________________________. price elasticity of demand for exports If the Canadians’ demand for Hong Kong goods is elastic, the decrease in export price will result in __________ in total export revenue. an increase If the Canadians’ demand for Hong Kong goods is inelastic, the decrease in export price will result in __________ in total export revenue. a decrease

  7. Price: CAD20 Exchange rate Price in HKD CAD1:HKD5.0 HKD_____ Hong Kong’s imports Effects of currency depreciation 3. Effects on price and volume of imports 100 CAD1:HKD5.5 HKD_____ 110 When the HKD depreciates against the CAD, Hong Kong’s import price will increase / decrease. Hong Kong’s volume of imports will increase / decrease.

  8. Effects of currency depreciation 4. Effects on import expenditure When the HKD depreciates against the CAD, Hong Kong’s total expenditure on imports (in terms of HKD) may increase or decrease, depending on the __________________________________. price elasticity of demand for imports If Hong Kong’s demand for Canadian goods is elastic, the increase in import price will result in __________ in total import expenditure. a decrease If Hong Kong’s demand for Canadian goods is inelastic, the increase in import price will result in __________ in total import expenditure. an increase

  9. Price: HKD100 Exchange rate Price in CAD CAD1:HKD5.0 CAD_____ Hong Kong’s exports Effects of currency appreciation 1. Effects on price and volume of exports 20 CAD1:HKD4.5 CAD_____ 22.22 When the HKD appreciates against the CAD, Hong Kong’s export price will increase / decrease. Hong Kong’s volume of exports will increase / decrease.

  10. Effects of currency appreciation 2. Effects on export revenue When the HKD appreciates against the CAD, Hong Kong exporters’ total revenue from exports (in terms of CAD) may increase or decrease, depending on the __________________________________. price elasticity of demand for exports If the Canadians’ demand for Hong Kong goods is elastic, the increase in export price will result in __________ in total export revenue. a decrease If the Canadians’ demand for Hong Kong goods is inelastic, the increase in export price will result in __________ in total export revenue. an increase

  11. Price: CAD20 Exchange rate Price in HKD CAD1:HKD5.0 HKD_____ Hong Kong’s imports Effects of currency appreciation 3. Effects on price and volume of imports 100 CAD1:HKD4.5 HKD_____ 90 When the HKD appreciates against the CAD, Hong Kong’s import price will increase / decrease. Hong Kong’s volume of imports will increase / decrease.

  12. Effects of currency appreciation 4. Effects on import expenditure When the HKD appreciates against the CAD, Hong Kong’s total expenditure on imports (in terms of HKD) may increase or decrease, depending on the __________________________________. price elasticity of demand for imports If Hong Kong’s demand for Canadian goods is elastic, the decrease in import price will result in __________ in total import expenditure. an increase If Hong Kong’s demand for Canadian goods is inelastic, the decrease in import price will result in __________ in total import expenditure. a decrease

  13. The linked exchange rate system The aim of the linked exchange rate system is to stabilise the exchange value of the Hong Kong dollar in terms of __________. US dollars send __________ to US dollars USD1 = HKD_____ 7.8 three note-issuing banks HKMA buy ___________________________ from Certificates of Indebtedness

  14. Day 1 USD1: CAD1.53 Day 2 USD1: CAD1.48 Take this challenge 1 A change in the exchange rate between the US dollar (USD) and Canadian dollar (CAD) is shown below: The US dollar appreciates / depreciates against the Canadian dollar. Under the linked exchange system, a depreciation of the US dollar against the Canadian dollar implies an appreciation / a depreciation of the Hong Kong dollar against the Canadian dollar.

  15. Q Q Take this challenge 2 Suppose the US dollar depreciates against the Japanese yen. What is the effect on the volume of Japan’s exports to the US? Answer Under what situation will Hong Kong’s import expenditure on Japanese goods increase? Answer

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