International Monetary Relations
3 important questions on International Monetary Relations
Foreign Exchange Market functions at 3 levels
o Transactions between commercial banks and their commercial customers
o Domestic interbank market conducted through brokers
o Active trading in foreign exchange with banks overseas.
o Domestic interbank market conducted through brokers
o Active trading in foreign exchange with banks overseas.
Reading Foreign Exchange Quotations
Direct quotation (DQ) versus Indirect quotation (IQ)
· Currency appreciation:
o It takes fewer units of a nation’s currency to purchase a unit of some foreign currency
· Currency depreciation:
o It takes more units of a nation’s currency to purchase a unit of some foreign currency
· Cross exchange rate
o Exchange rate between any two currencies (such as the franc and the pound)
o Derived from the rates of these two currencies in terms of a third currency (the dollar).
· Currency appreciation:
o It takes fewer units of a nation’s currency to purchase a unit of some foreign currency
· Currency depreciation:
o It takes more units of a nation’s currency to purchase a unit of some foreign currency
· Cross exchange rate
o Exchange rate between any two currencies (such as the franc and the pound)
o Derived from the rates of these two currencies in terms of a third currency (the dollar).
Exchange Rate Determination
· Increase in the demand for pounds:
- Shift rightwards è The dollar will depreciate
· Decrease in demand for pounds:
- Shift leftwards è The dollar will appreciate
· Increase in the supply of pounds:
- Rightward shift è Dollar appreciation
· Decrease in the supply of pounds:
- Leftward shift è Dollar depreciation.
- Shift rightwards è The dollar will depreciate
· Decrease in demand for pounds:
- Shift leftwards è The dollar will appreciate
· Increase in the supply of pounds:
- Rightward shift è Dollar appreciation
· Decrease in the supply of pounds:
- Leftward shift è Dollar depreciation.
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