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Bài giảng "International financial management - Chapter two: The determination of exchange rates" introduce to you the content: Exchange rate equilibrium, the fundamental of Central bank intervention. Invite you to consult. | CHAPTER TWO OVERVIEW CHAPTER TWO THE DETERMINATION OF EXCHANGE RATES 1/2/2013 CHAPTER 2 1 DEMAND FOR A CURRENCY (U.S. VIEWPOINT) • Exchange rate equilibrium • The fundamental of Central bank intervention 1/2/2013 CHAPTER 2 2 DEMAND CURVE FOR BRITISH POUNDS • Demand for foreign exchange by U.S. corporations / traders / governments that need to purchase: Price of BP in $ – foreign-produced trade items – foreign assets (real and financial). • Demand Curve: – Relationship between the quantity of FX demanded & the price of FX (exchange rate) – Negatively sloping $1.90 $1.80 10 Bill 20 Bill Quantity of BP CHAPTER 2 3 CHAPTER 2 4 1 SUPPLY FOR A CURRENCY (U.S. VIEWPOINT) SUPPLY CURVE FOR BRITISH POUNDS • Supply of foreign exchange by foreign corporations / traders / governments that need to purchase: Price of BP in $ – U.S. produced trade items – U.S. assets (real and financial). • Supply Curve: – Relationship between the quantity of FX demanded & the price of FX (exchange rate) – Positively sloping $1.90 $1.80 10 Bill 20 Bill Quantity of BP CHAPTER 2 5 CHAPTER 2 EXCHANGE RATE EQUILIBRIUM (U.S. VIEW POINT) 6 CHANGE IN MACROECONOMIC FACTORS & EXCHANGE RATE Equilibrium dollar price and quantity of British Pounds are determined such that American and British goods and assets are traded. • EVENTS Price of BP in $ Supply Curve for BP – – – – – $1.90 $1.70 Increase/decrease in relative domestic inflation Increase/decrease in relative domestic interest rates Increase/decrease in relative GDP FX trading by Governments FX trading by speculators due to change in expectations • EFFECTS: What happen to: $1.80 – The supply and demand schedules – The equilibrium exchange rate/price of the foreign currency Demand Curve for BP 10 Bill 15 Bill 20 Bill Quantity of BP CHAPTER 2 7 CHAPTER 2 8 2 • Demand Schedule: – Foreign goods are relatively cheaper to domestic consumers. – Merchandise imports increase. – Quantity of FX .
