Summary
International money and finance - summary week 1
- Course
- Institution
- Book
An in-depth summary of chapters 1 to 3 of the book International Finance (UVA-specific edition), including essential terms and pictures.
[Show more]
Connected book
Book Title:
Author(s):
- Edition:
- ISBN:
- Edition:
More summaries for
-
International money and finance - summary week7
-
International money and finance - summary week 6
-
International money and finance - summary week 5
Seller
Follow
natyprycova
Reviews received
Content preview
INTERNATIONAL MONEY AND FINANCECHAPTER 1 – THE FOREIGN EXCHANGE MARKET
- 1.2 THE EXCHNAGE RATE DEFINITIONS
o The price of currency in terms of another
▪ Domestic currency units per unit of foreign currency
▪ Foreign currency units per unit of domestic currency
- 1.3 CHARACTERISTICS AND PARTICIPANTS OF THE FOREIGN EXCHANGE MARKET
o Commercial banks, foreign exchange brokers and other agents
o Most traded currency → dollar
o Participants
▪ Retail clients → businesses, investors, corporations
▪ Commercial banks → carry out orders
▪ Foreign exchange brokers
• Banks trade through them
▪ Central banks
• Intervene to keep their currencies fixed
- 1.4 ARBITRAGE IN THE FOREIGN EXCHNAGE MARKET
o Instantaneous arbitrage between foreign exchange markets
o Financial centre arbitrage
▪ Ensures that dollar-pound exchange rate quoted in New York will be
the same in London
o Cross currency arbitrage
▪ Example: exchange rate of the dollar against the pound is $1.58/1
pound and exchange rate of dollar against euro is $1.3/1 euro
▪ The exchange rate of the euro against the pound will be 1.2154
euros/1 pound
• 1.58/1.3 = 1.2154
- 1.5 THE SPOT AND FORWARD EXCHNAGE RATES
o The spot exchange rate
▪ Intermediate delivery
▪ Normally two day lag
o The forward exchange rate
▪ Exchange rate for specified time in the future
- 1.6 NOMINAL, REAL AND EFFECTIVE EXCHANGE RATES
o Nominal exchange rate
▪ The amount of US dollars that will be obtained for one pound in the
foreign exchange market
▪ No reference to purchasing power
▪ Can also be presented in index form
▪ Increase/decrease does not imply that the country has more/less
competitive
o Real exchange rate
, ▪ Nominal exchange rate adjusted for relative prices between the
countries under consideration
𝑃∗
▪ 𝑆𝑟 = 𝑆 × 𝑃
• Sr → index of the real exchange rate
• S → nominal exchange rate in index form
• P → index of the domestic price level
• P* → index of the foreign price level
o Effective exchange rate
▪ A measure of whether or not the currency is appreciating or
depreciating against a weighted basket of foreign currencies
- 1.7 A SIMPLE MODEL OF THE DETERMINATION OF THE SPOT EXCHANGE RATE
o The demand for foreign exchange
▪ The higher the price, the less quantity is demanded
▪ Demand for pounds depends upon the demand for UK exports
▪ Increased demand for pounds → shift to the right
• Factors: rise in US income (they can buy more exported goods
from the UK), change in US taste in favour of the UK, rise in
price of US goods
o The supply of foreign exchange
▪ The UK demand for US dollars
▪ The higher the price, the more quantity supplied
▪ If pound appreciates → the cost of US exports becomes cheaper for
UK residents → they demand more US exports
▪ The supply of pounds schedule depends upon the UK demand for US
exports
• Shift to the right if increase in UK income
• Shift to the right if change in UK taste is favour of US
o Equilibrium
▪ Quantity and rate (dollar-pound rate)
- 1.8 ALTERNATIVE EXCHNAGE RATE REGIMES
o Floating exchange rate regime
▪ Authorities do not intervene → they allow the value of the currency to
change
▪ The currency appreciates and depreciates
o Fixed exchange rate regime
▪ Government intervene to keep exchange rate fixed
▪ Appreciation could be seen as undesirable → might hurt exports
▪ Depreciation might be seen as undesirable → might increase the cost
of imports + increase inflation
o Example: fixed rate of Hong Kong dollar against US dollar
o If Bank of England allow the foreign exchange market intervention to increase
the UK money supply and lower UK interest
▪ Risk of overshooting inflation target
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller natyprycova. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $6.95. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
53068 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now