international finance and exchange ratesssc.wisc.edu/~ctaber/100/interfin.pdf · the trading...
TRANSCRIPT
INTERNATIONAL FINANCE AND EXCHANGE RATES
• C H A P T E R 1 6
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CHAPTER OUTLINE
• International Financial Transactions• Foreign Exchange Markets• Alternative Foreign Exchange Systems
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YOU ARE HERE
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CURRENCY
• In the last set of lecture notes we looked at trade between nations
• We talked about trading burgers for buns and apples for coffee, but of course that is not what really happens
• Usually we sell apples for money and use the money to buy coffee
• However, this is complicated in international trade because there are different currencies
• In general people don’t like to just hold foreign currency• Its not very useful to have Yuan in Brazil• It doesn’t earn any interest just sitting there-would rather invest it or spend
on other stuffy
• The Balance of Payments keeps track of the accounting
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BALANCE OF PAYMENTS
• Balance of Payments: the accounting system for how money moves between countries to facilitate the purchase of goods, services, financial instruments, and physical investments.
• Current Account: The portion of the Balance of Payments accounting that represents that impacts of trade, short-term investment payments, and American payments of foreign taxes, foreign payments of American taxes, and the net transfer of private money.
• The Capital Account represents the changes in holding of longer term financial and physical assets by citizens of one country in another country.
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BALANCE OF PAYMENTS UNITED STATES, 2007
Major Accounting Item
Sub Accounting Item
Sub Acct component
Component Amount Sub Acct Balance Balance
Current Account
Balance of TradeExports $1,645,726
-$700,258
-$731,214Current Account
Balance of TradeImports $2,345,984
-$700,258
-$731,214Current Account
Balance of Short-term Investment Income
Income to the US $817,779
$81,749-$731,214Current
AccountBalance of Short-term Investment Income Payments from
the US -$736,030$81,749
-$731,214Current Account
Net Transfers (taxes, private payments) Net Transfers (taxes, private payments) Net Transfers (taxes, private payments) -$112,705
-$731,214
Capital Account
Change in the Ownership of Assets
US owned assets abroad $1,289,854
$767,849-$731,214Capital
Account
Change in the Ownership of Assets
Foreign owned assets in the US
$2,057,703$767,849
-$731,214Capital Account
Statistical Discrepancy & Net DerivativesStatistical Discrepancy & Net DerivativesStatistical Discrepancy & Net Derivatives -34,791
-$731,214
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CURRENT ACCOUNT MIRRORS THE BALANCE OF TRADE
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FOREIGN PURCHASES OF US ASSETS & US PURCHASES OF FOREIGN ASSETS
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TRADE REQUIRES CURRENCY
• Trade between countries is beneficial.• International trade requires that the currency of
the trading partners be exchanged. • The market where people come to trade
currencies is called the foreign exchange market.• E.g. the production and export of a radio can require
several currency transactions.
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FOREIGN EXCHANGE MARKETS
• The demand for a currency (say the dollar) is also the supply of the other currency (say the yen).
• The supply for a currency (say the dollar) is also the demand of the other currency (say the yen).
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Quantity of Yuan held by Americans
Price of Yuan in U.S.dollars
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Supply of Yuan to Americans given the price of Yuan in Dollars
Quantity of Yuan held by Americans
Price of Yuan in U.S.dollars
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Supply of Yuan to Americans given the price of Yuan in Dollars
Demand of Yuan by Americans given the price of Yuan in Dollars
Quantity of Yuan held by Americans
Price of Yuan in U.S.dollars
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Supply of Yuan to Americans given the price of Yuan in Dollars
Demand of Yuan by Americans given the price of Yuan in Dollars
Quantity of Yuan held by Americans
Price of Yuan in U.S.dollars
Equilibriumexchangerate
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We Could do this Completely the other way around and it won’t matter
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Quantity of Dollars held by Chinese
Price of U.S.dollarsin Yuan
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We Could do this Completely the other way around and it won’t matter
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Supply of Dollars to Chinese given the price of Dollars in Yuan
Quantity of Dollars held by Chinese
Price of U.S.dollarsin Yuan
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We Could do this Completely the other way around and it won’t matter
Thursday, October 20, 11
Supply of Dollars to Chinese given the price of Dollars in Yuan
Demand of Dollars by Chinese given the price of Dollars in Yuan
Quantity of Dollars held by Chinese
Price of U.S.dollarsin Yuan
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We Could do this Completely the other way around and it won’t matter
Thursday, October 20, 11
Supply of Dollars to Chinese given the price of Dollars in Yuan
Demand of Dollars by Chinese given the price of Dollars in Yuan
Quantity of Dollars held by Chinese
Price of U.S.dollarsin Yuan
Equilibriumexchangerate
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We Could do this Completely the other way around and it won’t matter
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EXCHANGE RATE CHANGES
So what happens when exchange rate changes?
•Suppose the Dollar appreciates relative to the Euro-that means we can get more Euros for our dollar•This decreases the price of European goods relative to U.S. goods so:
•Imports should rise•Exports should fall
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VARIOUS EXCHANGE RATES
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Table
American Dollar GO
Graph
American DollarAmerican Dollar GO
120 days2011 monthly average
Oct 18 - Oct 19
EUR/USD -1.099 %
CAD/USD -1.361 %
JPY/USD +0.050 %
AUD/USD -1.737 %
GBP/USD -0.559 %
GBP/EUR +0.546 %
JPY/EUR +1.162 %
GBP/AUD +1.199 %
JPY/AUD +1.819 %
USD GBP CAD EUR AUD 1 1.58043 0.98906 1.3828 1.03178 0.632738 1 0.625816 0.87495 0.65285 1.01106 1.59791 1 1.39809 1.04319 0.72317 1.14292 0.715259 1 0.746156 0.969193 1.53174 0.95859 1.3402 1 Wednesday, October 19, 2011
Top 10 Currencies
. American Dollar . Australian Dollar
. British Pound . Canadian Dollar
. Euro . Indian Rupee
. Mexican Peso . Singapore Dollar
. South African Rand . Thai Baht
More Currencies
Currency
. American Dollar . Argentine Peso
. Australian Dollar . Bahraini Dinar
. Botswana Pula . Brazilian Real
. British Pound . Brunei dollar
. Bulgarian Lev . Canadian Dollar
. Chilean Peso . Chinese Yuan
. Colombian Peso . Croatian Kuna
. Czech Koruna . Danish Krone
. Euro . Hong Kong Dollar
. Hungarian Forint . Iceland Krona
. Indian Rupee . Indonesian Rupiah
. Iranian Rial . Israeli New Shekel
. Japanese Yen . Kazakhstani Tenge
. Kuwaiti Dinar . Latvian Lat
. Libyan Dinar . Lithuanian Litas
. Malaysian Ringgit . Mauritius Rupee
. Mexican Peso . Nepalese Rupee
. New Zealand Dollar . Norwegian Kroner
. Omani Rial . Pakistan Rupee
. Philippine Peso . Polish Zloty
. Qatari Rial . Romanian Leu
. Russian Ruble . Saudi Riyal
. Singapore Dollar . South African Rand
. South Korean Won . Sri Lanka Rupee
. Swedish Krona . Swiss Franc
. Taiwan Dollar . Thai Baht
. Trinidad/Tobago Dollar . Turkish Lira
. Utd. Arab Emir. Dirham . Venezuelan Bolivar
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The Way to Read this is 1 US Dollar buys 0.72 Euros
Thursday, October 20, 11
VARIOUS EXCHANGE RATES
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ALTERNATIVE FOREIGN EXCHANGE SYSTEMS
• Floating exchange rate system: a system whereby markets determine the value of a currency relative to all other currencies.
• Fixed exchange rate system : a system whereby a government sets the value of a currency relative to all other currencies and uses its reserve of foreign currencies or gold to maintain the exchange rate.
• Managed Float exchange rate system: a system whereby governments decide the range of exchange rates they will allow the market to create, and act only when either the top end or the bottom end of that range is breached.
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