Currency Exchange

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Currency Exchange
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• Currency exchange is the buying and selling of
  currency
• In order to trade, currency must first be
  exchanged
• The demand for one currency is equal to the
  supply of the other
• In currency exchange you will always have two
  diagrams the two currencies

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Exchange Rates

• Relates the value of one currency to another
• The value of one currency is expressed in terms
  of the other
• Two types of pure exchange rates
• Floating
• Fixed

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Floating Exchange Rate

• Exchange rates are determined by market forces or
  the equilibrium of supply and demand

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Appreciation and Depreciation

• Appreciation an increase in the value of a
  currency in a floating exchange rate
• Depreciation a fall in the value of a currency
  in a floating exchange rate

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Changes in the Exchange Rate

• Foreign demand for a countrys exports
• Domestic demand for imports
• Relative interest rate changes
• Investment from abroad
• Relative rates of inflation
• Changes in income
• Speculation

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Fixed Exchange Rate

• Exchange Rates are fixed by the central bank of
  each country and are not permitted to change in
  response to changes in currency supply and
  demand.
• Interventions
• Using official reserves to maintain the exchange
  rate
• Increasing the interest rate
• Efforts to limit imports
• Devaluation and Revaluation the government
  changes the exchange rate to a lower/higher value

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Managed Exchange Rates

• Combines both elements of both the Floating and
  Fixed exchange rates.

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Calculating Exchange Rates

• 1.5 US dollars 1 Euro
• 1 dollar 1/1.5 Euro 0.67 Euro
• 1.5 dollars 1 Euro and 0.67 Euro 1 dollar
• Practice if 0.37 Rouble 1 Yen what is the
  price of 1 Rouble in terms of Yen?

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• Importers want to find the cost of goods in their
  own currency.
• Exchange Rates must be factored in.
• If 1.22 British Pounds () 1 Euro () and a
  person wants to import 1,000 bottles of wine from
  France at the price of 5 per bottle what is the
  cost in ?
• 6,100

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Value of in terms of
Jan 2010 1.22 July 2010 1.40
Feb 2010 1.25 Aug 2010 1.37
March 2010 1.33 Sept 2010 1.45
April 2010 1.39 Oct 2010 1.58
May 2010 1.47 Nov 2010 1.63
June 2010 1.43 Dec 2010 1.69
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Percentage Changes

• What was the percentage change in the value of
  the Euro between January and December 2010?
• ((1.69-1.22)/1.22)x100

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• The dollar also depreciated relative to the euro.
• First you must find the price of the dollar in
  terms of the euro.
• 0.59 0.82/0.82 x100
• -28.05

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Currency Demand and Supply Functions

• Qda-bP
• QscdP
• Market for Yen on a freely floating exchange rate
  system
• Qd and Qs are in terms of millions of yen
• The price of the yen is the exchange rate in
  terms of dollars.

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• Qd 8-2P
• Qs22P
• QdQs
• 8-2P 22P
• P 1.5 per Yen
• To find the quantity
• Qd 8-2(1.5) 5

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