MBB30

2. Money, Banking,
and Business
Lecture 30
Chapter 16
How Exchange Rates are
Determined

3. Questions?

4. Chapter 16
How Exchange Rates
are Determined

5. What is Money?
Trust

6. Globalization
1950 Today
Volume Low High
Rates Fixed Floating

7. Floating Rate
Rates can change
with every trade

8. Foreign Currency
Exchange
Forex
$5 trillion daily
dwarfs all other
markets

9. DailyVolume
FX $5.1 trillion
U.S.Treasury $530 billion 9.6 x
NYSE $40 billion 127.5 x
Foreign Currency
Exchange

10. 100+ Currencies

11. London
NewYork
Tokyo

12. one
unit
of
this
will buy ___ units of that

14. U.S.
Dollar
Price
Foreign
Price
=
Exchange
Rate

15. $1,276
€1,000
=
0.8146

16. € 815
$1,000
=
1.22707

17. Foreign Currency
Exchange
Pairs

18. $1.00
=
3.75 SAR
1.00 SAR
=
$0.267

20. $3.50 SAR 15

21. $3.50
x
3.75
=
SAR 13.13
SAR 15
÷
3.75
=
$4.00

22. Demand for Dollars
Foreigners to buy U.S.
Goods
Services
Securities

23. Supply for Dollars
Americans to buy Foreign
Goods
Services
Securities

24. Demand
Dollars
Yuan
Per Dollar
Supply
Chinese want
to buy more
American
stuff?
Americans
want to buy
more Chinese
stuff?
6.30
6.31
6.29

28. FX Speculation
Trading currencies
back and forth

29. Buy
Sell

30. FX Speculation
Trading currencies
back and forth

31. Dollars
Yuan
Per Dollar
Supply
6.30
Demand

32. Supply of Dollars
Income
Relative prices
Interest rates

33. Demand of Dollars
Income
Relative prices
Interest rates

34. Purchasing Power Parity
PPP
Exchange rates are always
adjusting so that relative
purchasing power of
currencies is equalized