1 / 18

International Finance

International Finance. Exchange Rate Determination Bill Reese. Learning Objectives. In this unit we will learn: The factors that influence changes in exchange rates How these factors can influence the supply of and demand for a currency. Exchange Rate Determination.

mercia
Download Presentation

International Finance

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. International Finance Exchange Rate Determination Bill Reese

  2. Learning Objectives • In this unit we will learn: • The factors that influence changes in exchange rates • How these factors can influence the supply of and demand for a currency

  3. Exchange Rate Determination • Measuring exchange rate movements • Always in relation to another currency • Appreciate vs. depreciate • Percent Δ = St – St-1 St

  4. Exchange Rate Determination • Measured over some period of time • Longer times → greater movements • Some currencies are more volatile than others • Example…

  5. Exchange Rate Determination

  6. Exchange Rate Equilibrium • Demand for a currency • Quantity demanded increases as price of currency decreases • Supply of a currency for sale • Quantity supplied increases as price of currency increases

  7. Demand Schedule for Pounds

  8. Supply Schedule for Pounds

  9. Equilibrium Exchange Rate

  10. Factors that Influence XRs • Liquidity of the currency • Illiquid market means large transactions may influence price

  11. Factors that Influence XRs • Relative inflation rates • Increase in U.S. inflation • Increased demand for British goods (greater demand for pounds) • Decreased demand for U.S. goods in Great Britian (fewer pounds for sale) • Demand and supply curves shift • Value of £ increases

  12. Rising U.S. Inflation

  13. Factors that Influence XRs • Relative interest rates • Increase in U.S. interest rates • Less interest in investing in G.B. (decreased demand for pounds) • Increased interest by British investors in investing in U.S. (more pounds for sale) • Demand and supply curves shift • Value of £ decreases

  14. Rising U.S. Interest Rates

  15. Factors that Influence XRs • Relative income levels • Increase in U.S. income level • Increased demand for British goods (increased demand for pounds) • No change in supply of pounds for sale • Demand curve shifts • Value of £ increases

  16. Rising U.S. Income Level

  17. Factors that Influence XRs • Government Controls • Imposing FX barriers • Imposing trade barriers • Intervening in FX markets • Policies affecting inflation, interest rates and income levels

  18. Factors that Influence XRs • Expectations vs. Changes • If FX market is efficient • Only unexpected changes and changes in expectations have effect • Interaction of factors • Rarely does anything happen in isolation • Levels of factor changes

More Related