台中央大学货币银行学MBchapter7.ppt

Chapter 7 The Foreign Exchange Market Exchange rate: The price of one currency in terms of another. Foreign exchange market: The financial market where foreign exchange transactions take place and exchange rates are determined. We develop a modern view of exchange rate determination that explains recent behavior in the foreign exchange market. Foreign Exchange market Trade between countries involves the mutual exchange of different currencies. The trading of currency and bank deposits denominated in particular currencies takes place in the foreign exchange market. Transactions conducted in the foreign exchange market determine the exchange rate, which in turn determine the cost of purchasing foreign goods and financial assets. Two kinds of exchange rate transactions Spot transactions: involving the immediate (two-day) exchange of bank deposits. Forward transactions: involving the exchange of bank deposits at some specified future date. The spot exchange rate is the exchange rate for the spot transactions. The forward exchange rate is the exchange rate for the forward transactions. When currency increases in value, it experiences appreciation. When currency decreases in value, it experiences depreciation. Exchange rates are important because they affect the relative price of domestic and foreign goods. The dollar price of French goods to an American is determined by the interaction of two factors: the price of French goods in Francs and the franc/dollar exchange rate. When a country’s currency appreciates, the country’s goods abroad become more expensive and foreign goods in that country become cheaper. When a country’s currency depreciates, the country’s goods abroad become cheaper and foreign goods in that country become more expensive. Foreign exchanges are not traded on exchanges. The foreign exchange market is organized as an over-the-counter market. Foreign exchange transactions involve the buying and selling of bank deposits denominated in different