International Trade and Exchange Rates

What problems do companies face when they buy or sell goods overseas?

May be forced to deal in a foreign currency, there may be barriers to product and capital flows, differences in legal traditions, reliable information to base credit decisions on foreign firms is difficult to source.

What are the two distinct kinds of international markets that facilitate international transactions?

International money and capital markets, and foreign exchange markets.

What do international money and capital markets provide?

A market for credit.

What do foreign exchange markets deal with?

The means of payment (currencies)

What is an exchange rate?

the rate at which one nation’s currency can be exchanged for another’s at the present time

How is this exchange rate quote read? EUR/USD=1.088

1 EUR is worth 1.088 USD

What is the first currency in the XR quote?

the base currency

What is the second currency in the XR quote?

the terms currency

direct and indirect XR quotes are based on what?

the perspective of the domestic individual

what is the XR quote called if the base currency is a foreign currency and the terms currency is the domestic currency?

Direct quote

what is the XR quote if the base currency is the domestic currency and the terms currency is the foreign currency?

Indirect quote

For the following XR quote, AUS/NZD=1.09, 1 AUS is worth 1.09 NZD, name the direct and indirect quote

for NZer this is called a direct quote, for AUS this is called an indirect quote

What are the prices that a foreign exchange (forex) dealer quotes?

The bid price and ask price

What is the bid price?

the price that the forex dealer will buy the base currency

What is the ask, also called the offer, price?

the price that the dealer will sell the base currency

For the forex dealer/broker quote, explain what the two prices mean:

EUR/NZD bid 1.7803 ask 1.7808

The dealer wants to buy 1 EUR at a price of 1.7803 NZD
The dealer wants to sell 1 EUR at a price of 1.7808 NZD

EUR/NZD bid 1.7803 ask 1.7808
If you come back from holiday in France and have some leftover Euro bills which quote is relevant for you?

bid price 1 EUR for 1.7803 NZD

EUR/NZD bid 1.7803 ask 1.7808
If you plan to go on holiday and you want to buy some Euro bills which quote is relevant for you?

ask price 1 EUR for 1.7805 NZD

EUR/NZD bid 1.7803 ask 1.7808

How does the dealer make a profit?

buying low and selling high

for the quote:
EUR/NZD 1.781 (Bid), how many euros is 1 NZD worth?

1/1.781= 0.561 EUR, the dealer would buy 0.561 EUR for 1 NZD, and sell 1 NZD for 0.561 EUR

what happens when a currency increases in value?

It appreciates, and it costs more to buy that currency

what happens when a currency falls in value?

it depreciates, and it costs less to buy that currency

EUR/NZD 1.77 10 March2024
EUR/NZD 1.80 9 April 2024
How much in % did the Euro appreciate against NZD?

0.03/1.77=1.69%

Why are exchange rates important?

they affect the relative price of domestic and foreign goods

What happens to the relative price of domestic and foreign goods when a countries currency appreciates?

the country’s goods abroad become more expensive and foreign goods in that country become cheaper

what affect would a depreciating NZ dollar have on NZ industries and domestic consumers?

It helps NZ industries sell more goods, but it hurts NZ consumers because foreign foods are more expensive

what is cross-currency triangulation of exchange rates?

When you calculate an exchange rate between two currencies that are both valued against another currency

Euro and NZD are valued against the dollar

EUR/USD=1.09 ‘1 EURO is worth 1.09 USD’

NZD/USD=0.60 ‘1 NZD is worth 0.60 USD’

Calculate NZD/EUR

0.6/1.09=0.55

1 NZD is worth 0.55 EUR

what does cross currency mean?

a currency pair or transaction that does not involve the US dollar

What determines the equilibrium exchange rate?

Demand and supply for currencies

What factors determine the demand and supply of currencies?

Exports and imports, the interest rate in the two countries

How do exports and imports affect the demand and supply of currencies?

Exports increase demand for the country's currency because foreign buyers need it to pay for goods. Imports increase the supply of the country's currency as it is exchanged to buy foreign goods

What happens when a country’s interest rates rise relative to another country’s?

Its currency becomes more attractive to investors, increasing demand.

How do lower interest rates affect the supply of a currency?

Lower interest rates lead investors to move funds abroad, increasing the supply of the currency in foreign exchange markets

What is the effect on a currency when interest rates fall?

The currency may depreciate due to lower demand and higher supply.

Why do investors move money to countries with higher interest rates?

To earn better returns on investments.