Number of 1 country’s currency that is equal to 1 unit of another country’s $1 = € $1 = £ 1€ = $ £ = $ $1 = € $1 = £ 1€ = $ £ = $ 1.47

Currency Last Trade U.S. $¥en ¥en 12/03 Euro Euro 12/03 Can $ Can $ 12/03 U.K. £ U.K. £ 12/03 Aust $ Aust $ 12/03 SFranc SFranc 12/03 U.S. $ ¥en Euro Can $ U.K. £ Aust $ SFranc

Currency Last Trade U.S. $ ¥en ¥en 3/04 Euro Euro 3/04 Can $ Can $ 3/04 U.K. £ U.K. £ 3/04 Aust $ Aust $ 3/04 SFranc SFranc 3/04 U.S. $ ¥en Euro Can $ U.K. £ Aust $ SFranc

Currency Last Trade U.S. $ N/A ¥en ¥en 11/05 Euro Euro 11/05 Can $ Can $ 11/05 U.K. £ U.K. £ 11/05 AU $ AU $ 11/05 Swiss Franc Swiss Franc 11/ U.S. $= 1 ¥en¥en= 1 EuroEuro= 1 Can $Can $= 1 U.K. £U.K. £= 1 AU $AU $= 1 Sw FrancSw Franc=

CurrencyYahoo Nov 2005 Yahoo Mar 2005 Yahoo Mar 2004 Yahoo Dec 2003 Text Oct 2002 U.S. $11111 ¥en Euro Can $ U.K. £ Aust $ SFranc

Currency Pair Price EUR/USD AUD/USD GBP/USD JPY/USD CAD/USD CHF/USD Currency Pair Price USD/EUR USD/AUD USD/GBP USD/JPY USD/CAD USD/CHF How many $$ you get with one of theirs? How many $$ does it take to get one of theirs?

Labatt’s beer is produced in Canada. In 1990, in Ontario, a six-pack of Labatt’s beer sold for $6.60 Canadian. Across the border in Michigan, a six pack of the same beer was on sale for $2.75 U.S. At the time, the exchange rate was $0.75 U.S. = $1.00 Canadian.

In Ontario, $6.60 Canadian. In Michigan, $2.75 U.S. $0.75 U.S. = $1.00 Canadian. 1. How much would it cost in U.S. currency to buy the beer in Ontario? 2. How much would it cost in Canadian currency to buy the beer in Michigan? 3. Is there an arbitrage opportunity? 4. Where would you buy and where would you sell? 5. How much profit could you expect on a six-pack? $6.60 x.75 = $4.95 US $2.75 /.75 = $3.67 Can Buy in Michigan, sell in Ontario $ $2.75 = $2.20 US ($2.93 Canadian)

d. Devaluation – change rate 1. Fixed a. $1 = 1/35 oz of Gold b. 4 German marks = 1/35 oz of Gold c. $1 = 4 German marks

d. Depreciation – change rate 2. Flexible a. aka Floating b. Determined by supply and demand c. $1 = 4 German marks

3. Pegged a. Tied to another currency b. Often the $

$ Price of currency Quantity of Currency $6 $5 $4 $3 $2 $ D Buyers and Sellers Determine Exchange Rate D S S

1. Demand for foreign products 2. Changing economic conditions - Inflation makes goods more expensive 3. Interest Rates 4. Government Intervention Pegging

Would the value of the dollar, compared to the Swiss franc, increase if the exchange rate went from 1.3 francs = $1 to 1.2 francs = $1?

1. How many Japanese yen would have to be converted to dollars for a person in Japan to purchase a $30,000 SUV if the exchange rate were 125 yen = $ How many yen would have to be converted to dollars to purchase the $30,000 SUV after the exchange rate changed to 110 yen = $ How many dollars would have to be converted to yen for a person in Altavista to purchase a 3,000,000 yen Japanese automobile if the exchange rate were 125 yen = $ How many dollars would have to be converted to yen to purchase the 3,000,000 yen auto after the exchange rate changed to 110 yen = $1.00

Changes in the Exchange Rate Determinants: 1.A change in national income (relative to trading partners) people buy more, or less of everything. 2.A change in the inflation rate in one country. a. Higher rate decreases demand b. Lower demand - depreciation 3.A change in interest rates (relative to rates abroad). a. High rates attract money b. Currency appreciates 4. Changes in tastes

$: (1)Appreciation or (2)Depreciation? 1.The US reduces tariffs on Mexican products. 2.Mexico encounters severe inflation. 3.Deteriorating political relations reduce American tourism in Mexico. 4.The US economy moves into a severe recession 5. A bartender puts a lime in a Corona and beer sales jump 6.The Mexican government encourages American firms to invest in Mexican oil fields 7.A large federal government budget deficit raises interest rates in the US

Euro: (1)Appreciation or (2)Depreciation? 1.An American importer purchases a shipload of Bordeaux wine. 2.BMW decides to build an assembly plant in LA 3.A CVCC student decides to spend a year studying at the Sorbonne. 4.A Spanish manufacturer exports machinery to Morocco on an American freighter. 5. The US incurs a balance of payments deficit in its transactions with Belgium. 6.A US government bond held by an Italian citizen matures. 7.It is widely believed that the international value of the Euro will fall in the near future.

Would each of the following developments cause the dollar to appreciate or depreciate? a. The perception by other countries that the quality of US goods is improving b. A large budget deficit that raises interest rates in the US c. Intervention by the Federal Reserve in foreign exchange markets that results in dollars moving into those markets d. A poor harvest in most of the grain-producing countries of the world except the US e. The expectation of war between several Middle Eastern countries.