10-1 Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall The Determination of Exchange Rates

10-2 Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall Exchange Rates The world can be divided into: – Countries that basically let their currencies float according to market forces with minimal or no Central Bank intervention – Countries that do not but rely on heavy Central Bank intervention and control Anyone involved in international business needs to understand how the exchange rates of countries with which they do business are determined

10-3 Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall The Determination Of Exchange Rates Currencies that float freely respond to supply and demand conditions free from government intervention The demand for a country’s currency is a function of the demand for its goods and services and the demand for financial assets denominated in its currency Fixed exchange rates do not automatically change in value due to supply and demand conditions but are regulated by their Central Banks

10-4 Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall Central Banks Central banks are the key institutions in countries that intervene in foreign-exchange markets to influence currency values A central bank intervenes in money markets by increasing a supply of its country’s currency when it wants to push the value of the currency down and by stimulating demand for the currency when it wants the currency’s value to rise

10-5 Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall Factors that determine exchange rates purchasing-power parity confidence in the government’s ability to manage the political and economic environment

10-6 Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall Factors to Monitor Major factors that managers should monitor when trying to predict the timing, magnitude, and direction of an exchange-rate change include – confidence factors – events