Exchange Rates L & R

Exchange Rate

The relative price of one currency in terms of another, representing how many units of one currency can be exchanged for one unit of another

Direct Quotation

Price of foreign currency in terms of domestic currency eg. USD/CAD = 1.37 (1 USD costs 1.37 CAD)

Indirect Quotation

Price of domestic currency in terms of foreign currency eg. CAD/USD = 0.73 (1 CAD costs 0.73 USD

Currency Pair Format X/Y (USD/CAD)

• X is the base currency (first position)

• Y is the quote currency (second position)

• The exchange rate states how many units of Y (quote) you need for 1 unit of X (base)

Appreciation

The domestic currency gains value relative to a foreign currency, so it buys more of the foreign currency

Depreciation

The domestic currency loses value relative to a foreign currency, so it buys less of the foreign currency

Appreciation (Direct Terms)

When the exchange rate decreases the domestic currency is appreciating

Depreciation (Direct Terms)

When the exchange rate increases the domestic currency is depreciating

CAD Depreciation

• Makes imports more expensive, reduces purchasing power for imported goods

• Makes exports more competitive, makes CA products cheaper to foreigners

• Depreciation contributes to higher inflation

  • Imported goods more expensive (cost push inflation)

  • CA goods more attractive causing a rise in demand (demand pull inflation)

Foreign exchange market

• Over-the-counter market where brokers/dealers negotiate directly with one another, so there is no central exchange

• Most liquid financial market, largest in terms of volume trading

• 24 hours on weekdays

• Traders include large banks, central banks, institutional investors, currency speculators, corporations, governments, and retail investors

Spot trading

Trading currencies

Outright forwards, swaps and other derivatives

Trading meant to hedge risk

Spot Contact (Spot rate)

Interbank bid-ask vs Retail bid-ask

Interbank bid ask spread are very small

Retail bid ask spread is wider to cover transaction costs

Cross-rates

A cross-exchange rate is an exchange rate between a currency pair where neither currency is in US dollar, can be calculated from the US dollar exchange rate for the two currencies

Speculation

Buying or selling currency based on expectations of future price changes, aiming for profit but taking on risk (most trades in market)

Arbitrage

Taking advantages of price inconsistencies between different currency pairs in the FX market to earn a risk-free profit

Risk Comparison

Speculation involves uncertainty and potential losses, while arbitrage relies on temporary misplacing and is generally low risk

• Speculators try to profit from market movement, while arbitrageurs help correct mispricing

Triangular Arbitrage

Possible if the direct quotes are not consistent with cross-exchange rates, a triangular arbitrage profit is possible

R What effect are deportations having?

• Raising the prices of critical goods and services

• Gutting a key driver of innovation

• Elimitinating the only force to rein in national debt

R Stats on immigration

• Immigrants less likely to commit crimes then natural born citizens

• Immigrants add to the demand supply sides of the US economy

• Immigrants comprise 1/3 of America’s construction work force contributing to housing supply

• Reducing and disincentivizing immigrations puts direct upward pressure on the prices of critical goods and services

• Immigrants workers are not a substitute for US labour

• Skilled immigration enhances tech innovation

R Why is illegal immigration good for the economy

Net positive for federal budget because undocumented immigrants typically contribute to the economy but cannot claim benefits like social security

R How is Iran sanctioning USA

• By closing the Strait of Hormuz, they impose 1st orders cots on many Americans

• World oil markets so interconnected changes in the price of Brent Crude affect oil prices everywhere

• Federal reserve can’t cut rates with oil at or above $100/barrel

R What do some suggest US does in response to Iran

• Place an embargo on Iranian oil to disrupt oil flow to China and other regions but China has a lot of stored oil and can hold out longer than US