foreign exchange rate report final

8/3/2019 Foreign Exchange Rate Report Final

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DE LA SALLE LIPAGLOBAL ECONOMICS

FOREIGN EXCHANGE RATE

Edcon P. MijaresDecember 03, 2011


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Edcon P. MijaresGLOBAL ECONOMICS December 03,2011

SCOPE:

FOREIGN EXCHANGE MARKET SUPPY & DEMAND

WHAT IS FOREIGN EXCHANGE RATE? FOREIGN EXCHANGE RATE DEMAND AND SUPPLY

CURVE:

FOREIGN EXCHANGE RATE EQUILIBRIUM

DEFICITSURPLUS

ARBITRAGE

EFFECT OF ARBITRAGE

DEPRCIATION AND APPRECIATION

CROSS EXCHANGE RATE


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FOREIGN EXCHANGE MARKET SUPPY & DEMAND

UU$$AADOMESTIC COUNTRYDOMESTIC COUNTRY FOREIGN COUNTRYFOREIGN COUNTRY

United Kingdom

DEMANDDEMAND

nneeded by locals to do transactionseeded by locals to do transactions

in investing, importing, touringin investing, importing, touring

SUPPLYSUPPLY

gain from investors,gain from investors,exporters, touristexporters, tourist

CONDITION EFFECTCOMMERCIAL BANK

EFFECTCENTRAL BANK EFFECT

D > SD > S SHORTAGESHORTAGEBARROW TO CENTRALBARROW TO CENTRAL

BANKBANK

BALANCE OF PAYMENTBALANCE OF PAYMENT

DEFICITDEFICIT

D < SD < S SURPLUSSURPLUSCHANGE TO CENTRALCHANGE TO CENTRAL

BANKBANK


SURPLUSSURPLUS


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WHAT IS FOREIGN EXCHANGE RATE?

an foreign-exchange rate (also known as the exchange rate,

forex rate or FX rate) between two currencies is the rate at

which one currency will be exchanged for another.

the value of one countrys domestic currency in terms of

another foreign currency.

the amount or price of Domestic currency to purchase one

foreign currency.

an foreign-exchange rate (also known as the exchange rate,

forex rate or FX rate) between two currencies is the rate at

which one currency will be exchanged for another.

the value of one countrys domestic currency in terms of

another foreign currency.

the amount or price of Domestic currency to purchase one

foreign currency.

FORMULA:Exchange Rate [R] =

Foreign Currency

Domestic Currency


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UU$$AADOMESTIC COUNTRYDOMESTIC COUNTRY FOREIGN COUNTRYFOREIGN COUNTRY

USA will BUY to UKUSA will BUY to UK

UK will SELL to USAUK will SELL to USA

RATIO OF VS $RATIO OF VS $

1 = 2$1 = 2$

[R] =Foreign Currency

Domestic Currency $21

==$2

United Kingdom

CASE:

HOW MUCH $ IS REQUIRED TO PURCHASED 500?

CASE:

HOW MUCH $ IS REQUIRED TO PURCHASED 500?

$ = [R] * Amount = $2 * 500 = $1,000



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UU$$AADOMESTIC COUNTRYDOMESTIC COUNTRYFOREIGN COUNTRYFOREIGN COUNTRY

UK will BUYUK will BUY $$ to USAto USA

RATIO OF VS $RATIO OF VS $

1 = 2$1 = 2$

[R] =Foreign Currency

Domestic Currency 1$2

== 0.5

$

United Kingdom

CASE:

HOW MUCH IS REQUIRED TO PURCHASED $500?

CASE:

HOW MUCH IS REQUIRED TO PURCHASED $500?

= [R] * Amount = 0.5$ * $ 500 = 250

USA will SELLUSA will SELL $$ to UKto UK



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Therefore:

FOREIGN EXCHANGEFOREIGN EXCHANGE

RATE is theRATE is the PRICEPRICE of theof the

FOREIGN CURRENCYFOREIGN CURRENCY ..

PRICEPRICE of aof a COMMODITYCOMMODITY

FOREIGN EXCHANGE RATEFOREIGN EXCHANGE RATE



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FOREIGN EXCHANGE RATE DEMAND CURVE:

0.50

1.00

1.50

2.00

50 100 150 200 250 300 350 400

R=

$/

Million /day

the lower the exchange rate the

greater the quantity needed by locals.

Cheaper to purchase .Cheaper to IMPORT (buy products).

Cheaper to INVEST to UK.

Cheaper to TOUR (go and live to UK)

the higher the exchange rate the lesser

the quantity needed by locals.

Expensive to purchase .Expensive to IMPORT (buy products).

Expensive to INVEST to UK.

Expensive to TOUR (go and live to UK)


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FOREIGN EXCHANGE RATE SUPPLY CURVE:

0.50

1.00

1.50

2.00

50 100 150 200 250 300 350 400

R=

$/

Million /day

the higher the exchange rate the

greater the quantity supplied by UK.

Cheaper to purchase $.

Cheaper to IMPORT (buy products).Cheaper to INVEST to US.

Cheaper to TOUR (go and live to US)

the lower the exchange rate lesser the

quantity needed by locals.Expensive to purchase $.

Expensive to IMPORT (buy products).

Expensive to INVEST to US.

Expensive to TOUR (go and live to US)


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FOREIGN EXCHANGE RATE DEMAND & SUPPLY CURVE EQUILIBRIUM:

0.50

1.00

1.50

2.00

50 100 150 200 250 300 350 400

R=

$/

Million /day

A

B

C

D

F

G

H

S

E

Equilibrium

Point

At Equilibrium Point E:

R = 1.00 $/

S

(Supply Qty) = D

(Demand Qty) = 200


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FOREIGN EXCHANGE RATE DEFICIT:

0.50

1.00

1.50

2.00

50 100 150 200 250 300 350 400

R=

$/

Million /day

A

B

C

D

F

G

H

S

E

Equilibrium

Point

DEFICIT=300 M/day

At R=0.50 $/ :

Diff = S - D

Diff = 50 350Diff = -300 [DEFICIT]

D@ point C:Demand Qty = 350

S@ point H:

Supply Qty = 50



D > SD > S SHORTAGESHORTAGEBARROW TO CENTRALBARROW TO CENTRAL

BANKBANK


DEFICITDEFICIT


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FOREIGN EXCHANGE RATE SURPLUS:

0.50

1.00

1.50

2.00

50 100 150 200 250 300 350 400

R=

$/

Million /day

A

B

C

D

F

G

H

S

E

Equilibrium

Point

At R=2.00 $/ :

S@ point F:

Supply Qty = 350

D@ point A:Demand Qty = 50

Diff = S - D

Diff = 350 50Diff = 300 [SURPLUS]

SURPLUS=300 M/day



D < SD < S SURPLUSSURPLUSCHANGE TO CENTRALCHANGE TO CENTRAL

BANKBANK


SURPLUSSURPLUS


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FOREIGN EXCHANGE RATE SURPLUS:

0.50

1.00

1.50

2.00

50 100 150 200 250 300 350 400

R=

$/

Million /day

A

B

C

D

F

G

H

S

E

Equilibrium

Point

At FLEXIBLE

RATESURPLUS

DEFICIT

SURPLUS

DEFICIT

FLEXIBLE RATE will move theFLEXIBLE RATE will move the

SURPLUS and DEFICIT conditionSURPLUS and DEFICIT condition

back to EQUILIBRIUM POINTback to EQUILIBRIUM POINTHOW???HOW???


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BY ARBITRAGE:

0.50

1.00

1.50

2.00

50 100 150 200 250 300 350 400

R=

$/

Million /day

E1

S

D1

0.80

140

EXCHANGE RATE AT USA

0.50

1.00

1.50

2.00

50 100 150 200 250 300 350 400

R=

$/

Million /day

D

E11.20

140

EXCHANGE RATE AT UK

S1

is the practice of taking advantage ofa price difference between two or more markets.

refer to the purchase ofa currency in the monetary centre where it is cheaper that is

for immediate resale in the monetary centre where it is more expensive in order to

make a profit.

Is the force that kept the exchange rate between two currencies the same in different

monetary centre.


refer to the purchase ofa currency in the monetary centre where it is cheaper that is

for immediate resale in the monetary centre where it is more expensive in order to

make a profit.

Is the force that kept the exchange rate between two currencies the same in different

monetary centre.ARBITRAGEUR

People who engage in arbitrage

(bank or brokerage firm)

BUY to USA

Price is 0.80$/

SELL to UKPrice is 1.20 $/

PROFIT

0.40 $/

Buy 60M to

USA

PROFIT24M $

SELL 60M to

UK


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BY ARBITRAGE:

0.50

1.00

1.50

2.00

50 100 150 200 250 300 350 400

R=

$/

Million /day

D2

E1

S

D1

0.80

140

EXCHANGE RATE AT USA

0.50

1.00

1.50

2.00

50 100 150 200 250 300 350 400

R=

$/

Million /day

D

E1

S2

1.20

140

EXCHANGE RATE AT UK

S1


refer to the purchase ofa currency in the monetary centre where it is cheaper that is for

immediate resale in the monetary centre where it is more expensive in order to make a

profit. Is the force that kept the exchange rate between two currencies the same in different

monetary centre.


refer to the purchase ofa currency in the monetary centre where it is cheaper that is for

immediate resale in the monetary centre where it is more expensive in order to make a

profit. Is the force that kept the exchange rate between two currencies the same in different

monetary centre.

ARBITRAGEURPeople who engage in arbitrage

(bank or brokerage firm)

BUY to USAPrice is 0.80$/

SELL to UK

Price is 1.20 $/

PROFIT

0.40 $/

BUYING 60M at

USA

Will increase

demand of hus Demand Curve

will shift to the

right

SELLING 60M toUK

Will increase

supply of Thus Supply Curve

will shift to theright

E2

60M60M


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DEPRECIATION AND APPRECIATION:

0.50

1.00

1.50

2.00

50 100 150 200 250 300 350 400

R=

$/

Million /day

DE

SEDEPRECIATION

DEPRECIATION is the increase in the domestic

price of the foreign currency.

DEPRECIATION is the increase in the domestic

price of the foreign currency.

E2

DD

RESULTING FROM THE SHIFTING OF DEMAND CURVE TO

THE RIGTHFACTORS:

Due to appreciation of US residents to UK goods (increase in

importation)

Increase in Investment by US to UK.

Increase in Tourism in UK.

RESULTING FROM THE SHIFTING OF SUPPLY CURVE TO

THE LEFT

FACTORS:Due to decrease in interest of UK residents to US goods (decrease

in importation by UK)

Decrease in Investment by UK to US.

Decrease in Tourism in US.

0.50

1.00

1.50

2.00

50 100 150 200 250 300 350 400

R=

$/

Million /day

DE

SEAPPRECIATION

E2

DD

APPRECIATION is the decrease in the

domestic price of the foreign currency.

APPRECIATION is the decrease in the

domestic price of the foreign currency.

RESULTING FROM THE SHIFTING OF DEMAND CURVE TO

LEFTFACTORS:

Due to decrease in interest of US residents to UK goods (decrease

in importation by US)

Decrease in Investment by US to UK.

Decrease in Tourism in UK.

RESULTING FROM THE SHIFTING OF SUPPLY CURVE TO

THE RIGHT

FACTORS:Due to appreciation of UK residents to US goods (increase in

importation)

Increase in Investment by UK to US.

Increase in Tourism in US.

SD

SD


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CROSS EXCHANGE RATE:

USAUSA UKUK

JAPANJAPANEuropeanEuropeanUnionUnion

$/ = 2

$/= 1.25

$/= 0.1101

/$ = 0.5

/= 0.625

/=0.05505

/$ = 0.8/ = 1.6

/ = 0.0881

/$ = 9.0827

/ = 18.1653

/ = 11.35

FORMULA:Cross Exchange Rate [R] =

Domestic Value of Foreign2

Domestic Value of Foreign1

=Foreign Currency1

Foreign Currency2

CASE: COMPUTE FOR CROSS EXCHANGE RATE OF / IN USA (COMPARE WITH / IN EUROPEAN UNION):CASE: COMPUTE FOR CROSS EXCHANGE RATE OF / IN USA (COMPARE WITH / IN EUROPEAN UNION):

Rate ofRate of / in USA = (2/1.25) = 1.6/ in USA = (2/1.25) = 1.6 //

SAME IN EUROPEANSAME IN EUROPEAN UNIONUNION

foreign exchange rate report final

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