1. Slide 13-1Copyright © 2003 Pearson Education, Inc. Exchange Rates and International Transactions Table 13-2: $/£ Exchange Rates and the Relative Price of American Designer Jeans and British Sweaters 返回 Exchange rate ($/£)1.251.501.75 Pound price of jeans (£)363025.71 Dollar price of sweaters($)62.57587.5 Relative price of sweaters in terms of jeans(pairs of jeans/ sweaters) 1.391.671.94 Note :The above calculations assume unchanged money price of $45 per pair of jeans and £50 per sweater. 說明

2. Slide 13-2Copyright © 2003 Pearson Education, Inc.  The pound price of jeans at an exchange rate of $1.25 per pound: ($45) / (1.25 $ / £ ) = £36.  The pound price of jeans at an exchange rate of $1.50 per pound: ($45) / (1.50 $ / £ ) = £30.  The pound price of jeans at an exchange rate of $1.75 per pound: ($45) / (1.75 $ / £ ) = £25.71.  The dollar price of sweaters at an exchange rate of $1.25 per pound: 1.25 $ / £  (£50) = $62.5.  The dollar price of sweaters at an exchange rate of $1.50 per pound: 1.50 $ / £  (£50) = $75.  The dollar price of sweaters at an exchange rate of $1.75 per pound: 1.75 $ / £  (£50) = $87.5. 返回 Exchange Rates and International Transactions

3. Slide 13-3Copyright © 2003 Pearson Education, Inc. Exchange Rates and International Transactions Table 13-2: $/£ Exchange Rates and the Relative Price of American Designer Jeans and British Sweaters 返回 Exchange rate ($/£)1.251.501.75 Pound price of jeans (£)363025.71 Dollar price of sweaters($)62.57587.5 Relative price of sweaters in terms of jeans(pairs of jeans/ sweaters) 1.391.671.94 Note :The above calculations assume unchanged money price of $45 per pair of jeans and £50 per sweater. 說明

4. Slide 13-4Copyright © 2003 Pearson Education, Inc.  The relative price of sweater in terms of jeans at an exchange rate of $1.25 per pound: ($62.5 per sweater) / ($45 per pair of jeans)=1.39 pairs of jeans per sweater.  The relative price of sweater in terms of jeans at an exchange rate of $1.50 per pound: ($75 per sweater) / ($45 per pair of jeans)=1.67 pairs of jeans per sweater.  The relative price of sweater in terms of jeans at an exchange rate of $1.75 per pound: ($75 per sweater) / ($45 per pair of jeans)=1.94 pairs of jeans per sweater. 返回 Exchange Rates and International Transactions

5. Slide 13-5Copyright © 2003 Pearson Education, Inc.  Exchange Rates and Relative Prices Import and export demands are influenced by relative prices. Appreciation of a country’s currency: –It makes home goods more expensive for foreigners and foreign goods cheaper for domestic residents. –Raises the relative price of its exports –Lowers the relative price of its imports Depreciation of a country’s currency: –It makes home goods cheaper for foreigners and foreign goods more expensive for domestic residents. –Lowers the relative price of its exports –Raises the relative price of its imports Exchange Rates and International Transactions

6. Slide 13-6Copyright © 2003 Pearson Education, Inc.  模型目的。  內生變數：決定模型兩軸。  行為法則：畫出模型曲線。  均衡：決定均衡之內生變數。  外生衝擊 判斷是否為外生變數改變？ 判斷此外生變數之改變將影響哪些行為法則？ 判斷此外生變數之改變造成行為法則何種影響？ 學習經濟模型五步驟  模型目的。

7. Slide 13-7Copyright © 2003 Pearson Education, Inc. The Foreign Exchange Market  Exchange rates are determined in the foreign exchange market. The market in which international currency trades take place  The Actors The major participants in the foreign exchange market are: –Commercial banks –International corporations –Nonbank financial institutions –Central banks

8. Slide 13-8Copyright © 2003 Pearson Education, Inc. Interbank trading –Foreign currency trading among banks –It accounts for most of the activity in the foreign exchange market. Exchange Rates and International Transactions

9. Slide 13-9Copyright © 2003 Pearson Education, Inc.  Characteristics of the Market The worldwide volume of foreign exchange trading is enormous, and it has ballooned in recent years. New technologies, such as Internet links, are used among the major foreign exchange trading centers (London, New York, Tokyo, Frankfurt, and Singapore). The integration of financial centers implies that there can be no significant arbitrage. –The process of buying a currency cheap and selling it dear. Exchange Rates and International Transactions

10. Slide 13-10Copyright © 2003 Pearson Education, Inc. Vehicle currency –A currency that is widely used to denominate international contracts made by parties who do not reside in the country that issues the vehicle currency. –Example: In 2001, around 90% of transactions between banks involved exchanges of foreign currencies for U.S. dollars. Exchange Rates and International Transactions

11. Slide 13-11Copyright © 2003 Pearson Education, Inc.  Spot Rates and Forward Rates Spot exchange rates –Apply to exchange currencies “on the spot” Forward exchange rates –Apply to exchange currencies on some future date at a prenegotiated exchange rate Forward and spot exchange rates, while not necessarily equal, do move closely together. Exchange Rates and International Transactions

12. Slide 13-12Copyright © 2003 Pearson Education, Inc. Figure 13-1: Dollar/Pound Spot and Forward Exchange Rates, 1981-2001 Exchange Rates and International Transactions

13. Slide 13-13Copyright © 2003 Pearson Education, Inc.  Foreign Exchange Swaps Spot sales of a currency combined with a forward repurchase of the currency. They make up a significant proportion of all foreign exchange trading. Exchange Rates and International Transactions

14. Slide 13-14Copyright © 2003 Pearson Education, Inc.  Futures and Options Futures contract –The buyer buys a promise that a specified amount of foreign currency will be delivered on a specified date in the future. Foreign exchange option –The owner has the right to buy or sell a specified amount of foreign currency at a specified price at any time up to a specified expiration date. Exchange Rates and International Transactions

15. Slide 13-15Copyright © 2003 Pearson Education, Inc.  模型目的。  內生變數：決定模型兩軸。  行為法則：畫出模型曲線。  均衡：決定均衡之內生變數。  外生衝擊 判斷是否為外生變數改變？ 判斷此外生變數之改變將影響哪些行為法則？ 判斷此外生變數之改變造成行為法則何種影響？ 學習經濟模型五步驟  內生變數

16. Slide 13-16Copyright © 2003 Pearson Education, Inc.  The demand for a foreign currency bank deposit is influenced by the same considerations that influence the demand for any other asset.  Assets and Asset Returns Defining Asset Returns –The percentage increase in value an asset offers over some time period. The Real Rate of Return –The rate of return computed by measuring asset values in terms of some broad representative basket of products that savers regularly purchase. The Demand for Foreign Currency Assets

17. Slide 13-17Copyright © 2003 Pearson Education, Inc.  Risk and Liquidity Savers care about two main characteristics of an asset other than its return: –Risk –The variability it contributes to savers’ wealth –Liquidity –The ease with which it can be sold or exchanged for goods The Demand for Foreign Currency Assets

18. Slide 13-18Copyright © 2003 Pearson Education, Inc. The Demand for Foreign Currency Assets Rates of return (in dollar terms) Exchange rate, E $/€

19. Slide 13-19Copyright © 2003 Pearson Education, Inc.  Interest Rates Market participants need two pieces of information in order to compare returns on different deposits: –How the money values of the deposits will change –How exchange rates will change A currency’s interest rate is the amount of that currency an individual can earn by lending a unit of the currency for a year. –Example: At a dollar interest rate of 10% per year, the lender of $1 receives $1.10 at the end of the year. 說明 The Demand for Foreign Currency Assets

20. Slide 13-20Copyright © 2003 Pearson Education, Inc. The Demand for Foreign Currency Assets 利率 = 利息 本金 = $1.10 - $1 $1 = $0.10 $1 = 10% 返回

21. Slide 13-21Copyright © 2003 Pearson Education, Inc.  Interest Rates Market participants need two pieces of information in order to compare returns on different deposits: –How the money values of the deposits will change –How exchange rates will change A currency’s interest rate is the amount of that currency an individual can earn by lending a unit of the currency for a year. –Example: At a dollar interest rate of 10% per year, the lender of $1 receives $1.10 at the end of the year. 說明 The Demand for Foreign Currency Assets

22. Slide 13-22Copyright © 2003 Pearson Education, Inc. Figure 13-2: Interest Rates on Dollar and Deutschemark Deposits, 1975-1998 The Demand for Foreign Currency Assets

23. Slide 13-23Copyright © 2003 Pearson Education, Inc.  模型目的。  內生變數：決定模型兩軸。  行為法則：畫出模型曲線。  均衡：決定均衡之內生變數。  外生衝擊 判斷是否為外生變數改變？ 判斷此外生變數之改變將影響哪些行為法則？ 判斷此外生變數之改變造成行為法則何種影響？ 學習經濟模型五步驟  行為法則

24. Slide 13-24Copyright © 2003 Pearson Education, Inc.  Exchange Rates and Asset Returns The returns on deposits traded in the foreign exchange market depend on interest rates and expected exchange rate changes. In order to decide whether to buy a euro or a dollar deposit, one must calculate the dollar return on a euro deposit. The Demand for Foreign Currency Assets

25. Slide 13-25Copyright © 2003 Pearson Education, Inc.  Suppose that today’s exchange rate is $0.7 per euro, but that you expect the rate to be $0.76 per euro in a year. Suppose R $ is 10% per year while the R euro is 5%. While of these deposit offers the higher return? Step1:the dollar price of a € 1 depose is $0.7 (today’s exchange rate is $0.7 per euro) Step2:at the end of a year, your € 1 depose will be worth € 1.05(R € is 5%) Calculating the dollar rate of return on a euro deposit

26. Slide 13-26Copyright © 2003 Pearson Education, Inc. Step3:you expect the dollar value of your euro deposit after a year to be $0.798 (you expect the rate to be $0.76 per euro in a year) Step4:the expected dollar rate of return on a euro deposit as 14% ([0.798 – 0.7]/0.7) Step5:since the dollar rate of return on dollar deposit is 10%, you expect to do better by holding your wealth in the form of euro deposits.(despite the fact that R $ > R € ) Calculating the dollar rate of return on a euro deposit

27. Slide 13-27Copyright © 2003 Pearson Education, Inc.  A Simple Rule The dollar rate of return on euro deposits is approximately the euro interest rate plus the rate of depreciation of the dollar against the euro. –R € + (E e $/€ - E $/€ ) / E $/€ –The rate of depreciation of the dollar against the euro is the percentage increase in the dollar/euro exchange rate over a year: (E e $/€ - E $/€ ) / E $/€ where: R $ = interest rate on one-year dollar deposits R € = today’s interest rate on one-year euro deposits E $/€ = today’s dollar/euro exchange rate (number of dollars per euro) E e $/€ = dollar/euro exchange rate (number of dollars per euro) expected to prevail a year from today The Demand for Foreign Currency Assets

28. Slide 13-28Copyright © 2003 Pearson Education, Inc. The expected rate of return difference between dollar and euro deposits is: R $ - [R € + (E e $/ € - E $/€ )/E $/€ ]= R $ - R € - (E e $/€ -E $/€ )/E $/€ (13-1) When the difference in Equation (13-1) is positive, dollar deposits yield the higher expected rate of return. When it is negative, euro deposits yield the higher expected rate of return. The Demand for Foreign Currency Assets