1. Foreign Exchange
(aka. FOREX)
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2. 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).
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3. The turnover in FOREX markets is almost $4 trillion (USD) a day.
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4. What does this chart tell you about international trade in each country?
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5. Exchange Rate = Price of one currency relative to another currency
Exchange Rates
Exchange Rate = Price of one currency relative to another currency
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6. 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

7. 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

8. 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

9. Which currencies are at equilibrium?
1 Dollar = Yen
1 Peso = 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

10. Video: Down and Out Dollar
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11. 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
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12. 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”.
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13. 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”.
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14. 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.
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15. 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
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16. 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
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17. 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
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18. 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
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19. 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
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20. 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
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21. https://www. youtube. com/watch
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23. Practice Shifter Value of Dollar ($) Value of Yen (¥ ) 1 2 3 4 5 6 728
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24. 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?

25. 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
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26. 2008 Audit Exam
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27. 2008 Audit Exam
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28. High interest rates attract foreign currency
2008 Audit Exam
High interest rates attract foreign currency
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29. 2008 Audit Exam
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30. 2012 Audit Exam
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31. 2012 Audit Exam
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32. 2012 Audit Exam
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33. 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.
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34. Read the article found here
-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?

35. 2008 Audit Exam
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36. 2012 Audit Exam
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37. 2010 FRQ #3
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38. 2010 FRQ #3 https://www.youtube.com/watch?v=DPH7vgaxK2E Copyright
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39. 5 Key Graphs
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40. Macro Review
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41. Do You want Mr. Clifford to come to your school?
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