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Lecture Economics for investment decision makers: Chapter 9 - CFA In stitute

Chapter 9 - Currency exchange rates. This chapter define an exchange rate, and distinguish between nominal and real exchange rates and spot and forward exchange rates; describe functions of and participants in the foreign exchange market; describe functions of and participants in the foreign exchange market;. | Chapter 9 Currency Exchange Rates Presenter’s name Presenter’s title dd Month yyyy 1 1. Introduction The foreign exchange (FX) market is the market for trading currencies against each other. The FX market is the world’s largest market. The FX market facilitates world trade. The FX participants buy and sell currencies needed for trade, but also transact to hedge and speculate on currency exchange rates. An exchange rate is the price of a country’s currency in terms of another country’s currency. Copyright © 2014 CFA Institute 2 LOS: Define an exchange rate, and distinguish between nominal and real exchange rates and spot and forward exchange rates. Page 466 Notes to the presenter: The foreign exchange market, FX, is also referred to as the forex market. 2 2. The Foreign Exchange Market Currencies are referred to by their ISO code (e.g., USD, CHF, EUR). Exchange rate: The number of units of one currency (the price currency) that one unit of another (the base currency) will buy. . | Chapter 9 Currency Exchange Rates Presenter’s name Presenter’s title dd Month yyyy 1 1. Introduction The foreign exchange (FX) market is the market for trading currencies against each other. The FX market is the world’s largest market. The FX market facilitates world trade. The FX participants buy and sell currencies needed for trade, but also transact to hedge and speculate on currency exchange rates. An exchange rate is the price of a country’s currency in terms of another country’s currency. Copyright © 2014 CFA Institute 2 LOS: Define an exchange rate, and distinguish between nominal and real exchange rates and spot and forward exchange rates. Page 466 Notes to the presenter: The foreign exchange market, FX, is also referred to as the forex market. 2 2. The Foreign Exchange Market Currencies are referred to by their ISO code (e.g., USD, CHF, EUR). Exchange rate: The number of units of one currency (the price currency) that one unit of another (the base currency) will buy. Convention for exchange rate: A/B = Number of units of A that one unit of B will buy. A = Price currency B = Base currency Example: USD/INR = 61.965 This means that one Indian rupee will buy 61.965 US dollars. If this exchange rate falls to 60.5, the rupee will buy fewer US dollars. That means that it will take fewer US dollars to buy a rupee. In other words, The rupee is depreciating relative to the US dollar or The US dollar is appreciating relative to the rupee. Copyright © 2014 CFA Institute 3 LOS: Describe functions of and participants in the foreign exchange market. Pages 467–470 Notes to the presenter: There are many different conventions, but this presentation is using the conventions displayed by the authors in the chapters’ examples. 3 Real exchange rates A real exchange rate is an exchange rate that has been adjusted for the relative purchasing power of the two currencies’ home countries. Quoted exchange rates are nominal exchange rates. We calculate a real exchange rate by .