STUDENTS:

- DEL PORTAL HUAYNATE, RODRIGO

INTERNATIONAL FINANCE BUSINESS Mg. Julio Gustavo Garcia

“EXCHANGE RATES AND THE MARKET FOR FOREIGN CHANGES”

Professional School. Academic Period 2018

International Semester I
Business Administration Turn Night
 “EXCHANGE RATES AND THE MARKET FOR
FOREIGN CHANGES”

In the early years of the millennium, Americans
came to Paris to enjoy French cuisine. When
measured in dollars, prices in France were much
higher. Five years later, however, the prices of
French products were again high for Americans.
• WHAT ECONOMIC FORCES MADE
THE PRICES IN DOLLARS OF THE
FRENCH PROPERTY OSCILLARATE
SO MUCH?
One important factor was a STRONG DROP IN THE
PRICE in dollars of the currency of France after 1998,
followed by an equally sharp increase from 2002.

The price of one currency in terms of another is called

EXCHANGE RATE.

Because an exchange rate, the price of money from

one country in terms of another, is also an ASSET
PRICE, the principles that govern the behavior of other
ASSET PRICES ALSO GOVERN THE BEHAVIOR OF
EXCHANGE RATES.
 - To begin, we first learn how exchange rates allow us to compare the
prices of goods and services from different countries.
- Next, we describe the international asset market in which currencies
are traded and show how equilibrium exchange rates are determined
in that market.
STOCK - A final section underlines our approach to the asset market by
CHANGE EXCHAN
HOUSE GE showing how today's exchange rate responds to changes in expected
future values ​of exchange rates.

BANKS
LEARNING GOALS
• RELATE the changes in the relative prices of the countries'
exports.
• DESCRIBE the structure and functions of the foreign exchange
MONEY market.
• USE exchange rates to calculate and compare the returns on
assets denominated in different currencies.
• THE EFFECTS of interest rates and changes in expectations about
exchange rates.
 TYPES OF EXCHANGE AND INTERNATIONAL
TRANSACTIONS
- Exchange rates play a central role in international trade because they allow us to
compare the prices of goods and services produced in different countries.
- The relative prices of currencies are reported daily in the financial sections of
newspapers.
- Households and businesses use exchange rates to CONVERT FOREIGN PRICES IN
NATIONAL CURRENCY TERMS. Once the monetary prices of domestic goods and
imports have been expressed in terms of the same currency, households and firms can
calculate the relative prices that affect international trade flows.
 THE FOREIGN EXCHANGE MARKET

THE MARKET IN WHICH

INTERNATIONAL CURRENCY
TRADES TAKE PLACE IS CALLED
THE FOREIGN EXCHANGE
MARKET.

The major participants in the foreign exchange

market are commercial banks, corporations that
engage in international trade, nonbank financial
institutions such as asset-management firms and
insurance companies, and central banks.
Individuals may also participate in the foreign
THE ACTORS exchange market
for example, the tourist who buys foreign
currency at a hotel’s front desk
but such cash transactions are an insignificant
fraction of total foreign exchange trading.
 THE MAJOR ACTORS IN THE MARKET AND THEIR
ROLES.
1. COMMERCIAL BANKS: COMMERCIAL BANKS ARE AT THE CENTER OF THE FOREIGN
EXCHANGE MARKET BECAUSE ALMOST EVERY SIZABLE INTERNATIONAL TRANSACTION
INVOLVES THE DEBITING AND CREDITING OF ACCOUNTS AT COMMERCIAL BANKS IN
VARIOUS FINANCIAL CENTERS.

2. CORPORATIONS: CORPORATIONS WITH OPERATIONS IN SEVERAL COUNTRIES

FREQUENTLY MAKE OR RECEIVE PAYMENTS IN CURRENCIES OTHER THAN THAT OF THE
COUNTRY IN WHICH THEY ARE HEADQUARTERED.

3. NONBANK FINANCIAL INSTITUTIONS: OVER THE YEARS, DEREGULATION OF FINANCIAL

MARKETS IN THE UNITED STATES, JAPAN, AND OTHER COUNTRIES HAS ENCOURAGED
NONBANK FINANCIAL INSTITUTIONS SUCH AS MUTUAL FUNDS TO OFFER THEIR
CUSTOMERS A BROADER RANGE OF SERVICES, MANY OF THEM INDISTINGUISHABLE FROM
THOSE OFFERED BY BANKS. AMONG THESE HAVE BEEN SERVICES INVOLVING FOREIGN
EXCHANGE TRANSACTIONS. INSTITUTIONAL INVESTORS SUCH AS PENSION FUNDS OFTEN
TRADE FOREIGN CURRENCIES.

4. CENTRAL BANKS: IN THE PREVIOUS CHAPTER WE LEARNED THAT CENTRAL BANKS

SOMETIMES INTERVENE IN FOREIGN EXCHANGE MARKETS. WHILE THE VOLUME OF
CENTRAL BANK TRANSACTIONS IS TYPICALLY NOT LARGE, THE IMPACT OF THESE
TRANSACTIONS MAY BE GREAT. THE REASON FOR THIS IMPACT IS THAT PARTICIPANTS IN
THE FOREIGN EXCHANGE MARKET WATCH CENTRAL BANK ACTIONS CLOSELY FOR CLUES
ABOUT FUTURE MACROECONOMIC POLICIES THAT MAY AFFECT EXCHANGE RATES.
THANKS …