Chapter 13
The Foreign Exchange Market
Foreign Exchange Market What are Foreign Exchange Rates? Following the Financial News: Foreign Exchange Rates Why are Exchange Rates Important? How is Foreign Exchange Traded? Exchange Rates in the Long Run Law of One Price Theory of Purchasing Power Parity Why the Theory of Purchasing Power Parity Cannot Fully Explain Exchange Rates Factors That Affect Exchange Rates in the Long Run Exchange Rates in the Short Run Comparing Expected Returns on Domestic and Foreign Deposits Interest Parity Condition Demand Curve for Domestic Assets Supply Curve for Domestic Assets Equilibrium in the Foreign Exchange Market Explaining Changes in Exchange Rates Shift in the Demand for Domestic Assets Case: Changes in the Equilibrium Exchange Rate: Two Examples Changes in Interest Rates Changes in the Money Supply Exchange Rate Overshooting Case: Why are Exchange Rates So Volatile? Case: The Dollar and Interest Rates, 1973–2007 Case: The Euro’s First Nine Years Case: Reading the Wall Street Journal: The “Foreign Exchange” Column Following the Financial News: The “Currency Trading” Column The Practicing Manager: Profiting from Foreign Exchange Forecasts
Overview and Teaching Tips
Chapter 13 explains behavior in the foreign exchange market by using a modern asset-market approach to exchange rate determination. This asset-market approach is now the dominant method of analyzing exchange rate movements in the literature and it has major advantages over the more conventional treatment of the foreign exchange market typically found in financial markets and institutions textbooks.
Chapter 13
The Foreign Exchange Market
75
As the first case in the chapter indicates, the asset-market approach, in contrast to earlier approaches emphasizing import and export demand, can be used to explain a feature of the foreign exchange market that has received much attention in the press in recent years: the high volatility of exchange rates. This... [continues]
The Foreign Exchange Market
Foreign Exchange Market What are Foreign Exchange Rates? Following the Financial News: Foreign Exchange Rates Why are Exchange Rates Important? How is Foreign Exchange Traded? Exchange Rates in the Long Run Law of One Price Theory of Purchasing Power Parity Why the Theory of Purchasing Power Parity Cannot Fully Explain Exchange Rates Factors That Affect Exchange Rates in the Long Run Exchange Rates in the Short Run Comparing Expected Returns on Domestic and Foreign Deposits Interest Parity Condition Demand Curve for Domestic Assets Supply Curve for Domestic Assets Equilibrium in the Foreign Exchange Market Explaining Changes in Exchange Rates Shift in the Demand for Domestic Assets Case: Changes in the Equilibrium Exchange Rate: Two Examples Changes in Interest Rates Changes in the Money Supply Exchange Rate Overshooting Case: Why are Exchange Rates So Volatile? Case: The Dollar and Interest Rates, 1973–2007 Case: The Euro’s First Nine Years Case: Reading the Wall Street Journal: The “Foreign Exchange” Column Following the Financial News: The “Currency Trading” Column The Practicing Manager: Profiting from Foreign Exchange Forecasts
Overview and Teaching Tips
Chapter 13 explains behavior in the foreign exchange market by using a modern asset-market approach to exchange rate determination. This asset-market approach is now the dominant method of analyzing exchange rate movements in the literature and it has major advantages over the more conventional treatment of the foreign exchange market typically found in financial markets and institutions textbooks.
Chapter 13
The Foreign Exchange Market
75
As the first case in the chapter indicates, the asset-market approach, in contrast to earlier approaches emphasizing import and export demand, can be used to explain a feature of the foreign exchange market that has received much attention in the press in recent years: the high volatility of exchange rates. This... [continues]
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