Foreign Exchange (aka. FOREX) Copyright ACDC Leadership 2018

Exports and Imports US sells cars to Mexico Mexico buys tractors from Canada Canada sells syrup to the U.S. Japan buys Fireworks from Mexico For all these transactions, there are different national currencies. Each country must be paid in their own currency. The buyer (importer) must exchange their currency for that of the seller’s (exporter). Copyright ACDC Leadership 2018

The turnover in FOREX markets is almost $4 trillion (USD) a day. Copyright ACDC Leadership 2018

What does this chart tell you about international trade in each country? Copyright ACDC Leadership 2018

Exchange Rate = Price of one currency relative to another currency Exchange Rates Exchange Rate = Price of one currency relative to another currency Copyright ACDC Leadership 2018

5 Silver .2? Gold Value of 1 Gold = Value of 1 Silver = Silver per Gold Silver price in Gold Value of a Gold in Silver Value of 1 Silver = .2? Gold Gold per Silver Gold price in Silver Value of a Silver in Gold 150Million

The value of Silver rose Value of 1 Gold = 5 Silver Also called: Silver per Gold Silver price in Gold Value of a Gold in Silver Value of 1 Silver = .2 or 1/5 Gold Also called: Gold per Silver Gold price in Silver Value of a Silver in Gold What if 1 Gold = 2 Silver? Value of 1 Gold = Silver The value of Gold fell Depreciation Value of 1 Silver = .5 or 1/2 Gold The value of Silver rose Appreciation 150Million

The value of Silver rose Value of 1 Gold = 5 Silver Also called: Silver per Gold Silver price in Gold Value of a Gold in Silver Value of 1 Silver = .2 or 1/5 Gold Also called: Gold per Silver Gold price in Silver Value of a Silver in Gold What if 1 Gold = 10 Silver? Value of 1 Gold = 10 Silver The value of Gold rose Appreciated Value of 1 Gold = Value of 1 Silver = .1 or 1/10 Gold The value of Silver rose Deprecated Value of 1 Silver = 150Million

Which currencies are at equilibrium? 1 Dollar = 107.32 Yen 1 Peso = .0093 US Dollars 1 Dollar = .81 Euros 1 Euro = 1.23 Dollars 1 Dollar = 6.28 Yuan 1 Yuan = .16 Dollars $1 = 1 Bermudan Dollar 1 Bermudan Dollar = $1 Which currencies are at equilibrium? They all are! Equilibrium is set by demand and supply Appreciation and depreciation have to do with the change in the exchange rate, not the current exchange rate 150Million

Video: Down and Out Dollar https://www.nbc.com/saturday-night-live/video/adventures-of-the-dollar/2860897 Copyright ACDC Leadership 2018

Exchange Rates In the FOREX market, we only look at two countries/currencies at a time. Ex: US Dollars and Euros We examine the price of one currency in terms of the other currency. Ex:$3 = €2 The Exchange Rate depends on which currency you are converting. The price of one US Dollar in terms of Euros is 1 Dollar = €2/$3 = €.66 The price of one Euro in terms of Dollars is 1 Euro = $3/€2= $1.5 Copyright ACDC Leadership 2018

What happens if you need more dollars to buy one euro (the price for a euro increases)? Ex: From $3=€2 to $6=€2 The U.S. Dollar DEPRECIATES relative to the Euro. Depreciation- The loss of value of a country's currency with respect to a foreign currency. More units of dollars are needed to buy a single unit of the other currency. The dollar is said to be “Weaker”. Copyright ACDC Leadership 2018

What happens if you need less dollars to buy one euro (the price for a euro decreases)? Ex: From $3= €2 to $1= €2 The U.S. Dollar APPRECIATES relative to the euro. Appreciation- The increase of value of a country's currency with respect to a foreign currency. Less units of dollars are needed to buy a single unit of the other currency. The dollar is said to be “Stronger”. Copyright ACDC Leadership 2018

FOREX Supply and Demand Simplified Imagine a huge table with all the different currencies from every country. This is the Foreign Exchange Market! Just like at a product market, you can’t take things without paying. If you demand one currency, you must supply your currency. Ex: If Canadians what Russian Rubles. The demand for Rubles in the FOREX market will increase and the supply of Canadian Dollars will increase. Copyright ACDC Leadership 2018

What happens if Europeans prefer vacationing in the United States? € Dollars $ Euros $ € S er1 S S1 ere ere D1 er1 D D Quantity of Dollars Quantity of Euros The Dollar APPRECIATES The Euro DEPRECIATES Copyright ACDC Leadership 2018

Let’s use the example of the US Dollar and the British Pound FOREX Shifters Let’s use the example of the US Dollar and the British Pound https://www.youtube.com/watch?v=D41EuDh3epI&index=5&list=PL04578C46EDAB7734 Copyright ACDC Leadership 2018

2. Changes in Relative Incomes (Resulting in more imports)- 1. Changes in Tastes- Ex: British tourists flock to the U.S… Demand for U.S. dollars increases (shifts right). Supply of British pounds increases (shifts right). Pound-depreciates Dollar-appreciates 2. Changes in Relative Incomes (Resulting in more imports)- Ex: US growth increase US incomes…. U.S. buys more imports… U.S. Demand for pounds increases. Supply of U.S. dollars increases. Pound- appreciates Dollar- depreciates Copyright ACDC Leadership 2018

3. Changes in Relative Price Level (Resulting in more imports)- Ex: US prices increase relative to Britain…. U.S. demand for cheaper imports increases… U.S. demand for pounds increases. Supply of U.S. dollars increases. Pound- appreciates Dollar- depreciates 4. Changes in relative Interest Rates- Ex: US has a higher interest rate than Britain. British people want to put money in US banks. Capital Flow increase towards the US. British demand for U.S. dollars increases… British supply more pounds. Pound-depreciates Dollar- appreciates Copyright ACDC Leadership 2018

What will happen to the international value of the Mexican Peso if there is high inflation in Mexico? -The demand for pesos will decrease since Mexico's trading partners will not want to purchase higher priced Mexican products. -The supply will increase as Mexicans look to buy lower priced imports. Pesos The Peso DEPRECIATES Copyright ACDC Leadership 2018

What will happen to the international value of the Mexican Peso if the interest rate in Mexico falls? -The demand for pesos will decrease since people in other countries will buy fewer Mexican financial assets. -The supply will increase as Mexicans buy more financial assets in other countries. Pesos The Peso DEPRECIATES Copyright ACDC Leadership 2018

https://www. youtube. com/watch https://www.youtube.com/watch?v=9DVYVfI81R8&index=6&list=PL04578C46EDAB7734 Copyright ACDC Leadership 2018

https://www.youtube.com/watch?v=geoe-6NBy10

Practice Shifter Value of Dollar ($) Value of Yen (¥ ) 1 2 3 4 5 6 7 28 Copyright ACDC Leadership 2018

How do these scenarios affect exports and imports? Practice For each of the following examples, identify what will happen to the value of U.S. Dollars and Japanese Yen. American tourists increase visits to Japan. The US government significantly decreases personal income tax. Inflation in the Japan rises significantly faster than in the US. Japan has a large budget deficit that increases Japanese interest rates. Japan places high tariffs on all US imports. The US suffers a larger recession. The US Federal Reserve sells bonds at high interest rates. How do these scenarios affect exports and imports?

Practice Shifter Value of Dollar ($) Value of Yen (¥ ) 1 Tastes (S↑) Depreciates (D↑) Appreciates 2 Income 3 Price Level 4 Interest Rate 5 Regulation (D↓) Depreciates (S↓) Appreciates 6 (S↓)Appreciates 7 Scenarios 1, 2, and 4 will increase US exports because US products are now relatively “cheaper”. 30 Copyright ACDC Leadership 2018

2008 Audit Exam Copyright ACDC Leadership 2018

2008 Audit Exam Copyright ACDC Leadership 2018

High interest rates attract foreign currency 2008 Audit Exam High interest rates attract foreign currency Copyright ACDC Leadership 2018

2008 Audit Exam Copyright ACDC Leadership 2018

2012 Audit Exam Copyright ACDC Leadership 2018

2012 Audit Exam Copyright ACDC Leadership 2018

2012 Audit Exam Copyright ACDC Leadership 2018

Exchange Rate Regimes Fixed Exchange Rate- The government activity manages the country’s currency. Floating Exchange Rate- The market determines the value of the country’s currency. Some governments attempt to depreciate their country’s currency in order to promote exports. https://www.youtube.com/watch?v=_pL_5trI6YY&list=PL04578C46EDAB7734&index=7 Copyright ACDC Leadership 2018

Read the article found here https://www.investopedia.com/articles/forex/08/pegged-vs-floating-currencies.asp -According to the article, China fixed its exchange rate to the U.S. Dollar…. -How did China’s central bank play a role in accomplishing this? -What benefits did China get from doing this? -What negative impact did this have on China’s currency?

2008 Audit Exam Copyright ACDC Leadership 2018

2012 Audit Exam Copyright ACDC Leadership 2018

2010 FRQ #3 Copyright ACDC Leadership 2018

2010 FRQ #3 https://www.youtube.com/watch?v=DPH7vgaxK2E Copyright ACDC Leadership 2018

5 Key Graphs https://www.youtube.com/watch?v=0U54nTggSPE&index=9&list=PL04578C46EDAB7734 Copyright ACDC Leadership 2018

Macro Review https://www.youtube.com/watch?v=MKO1icFVtDc&list=PL04578C46EDAB7734&index=11 Copyright ACDC Leadership 2018

Do You want Mr. Clifford to come to your school? https://www.youtube.com/watch?v=rbOXZSjCPOA Copyright ACDC Leadership 2018