Foreign Exchange Market
1. Both Boeing and Airbus price their aircraft in US dollars. ANA, Japan’s largest airline, has ordered $16 billion in new aircraft split between Airbus and Boeing. Suppose the price for one Boeing model is $150 million. What is the current price for this aircraft in Japanese yen? Show the computation (hint: see Exhibit 14-2). There are many websites that show exchange rates, but here is one: http://www.usforex.com.
2. Just as with the price of a good, the price, or exchange rate, of a currency is determined by supply and demand. However, rather than using a traditional supply and demand analysis as shown in Marthinsen, currency traders often consider whether foreign funds will flow into or out of a country as a result of a particular economic circumstance. If foreigners wish to make domestic purchases or investments, foreign currency must first be exchanged for the domestic currency. Thus, foreign funds flowing into a country increase the demand for the domestic currency and it appreciates. Funds flowing out reverse this process leading to depreciation of the domestic currency. In the table, place an X to indicate whether each economic condition will cause foreign funds to flow in or out of the country and whether the domestic currency will appreciate or depreciate.
Domestic circumstance
Funds
flow in
Funds
flow out
Currency
appreciates
Currency
depreciates
Real interest rates are higher than in other countries
Risk of civil war
Business taxes are raised above world average
X
Expected stock market returns are better than elsewhere
Inflation increases
A large deposit of rare earth minerals is discovered
Rapidly growing manufacturing sector imports more foreign raw materials
3. Explain the historical exchange rates of the Argentine Peso to the US dollar using information from the 2 charts below. Use care to correctly interpret the charts. Original data is available, though not needed, from the websites listed below
2. Just as with the price of a good, the price, or exchange rate, of a currency is determined by supply and demand. However, rather than using a traditional supply and demand analysis as shown in Marthinsen, currency traders often consider whether foreign funds will flow into or out of a country as a result of a particular economic circumstance. If foreigners wish to make domestic purchases or investments, foreign currency must first be exchanged for the domestic currency. Thus, foreign funds flowing into a country increase the demand for the domestic currency and it appreciates. Funds flowing out reverse this process leading to depreciation of the domestic currency. In the table, place an X to indicate whether each economic condition will cause foreign funds to flow in or out of the country and whether the domestic currency will appreciate or depreciate.
Domestic circumstance
Funds
flow in
Funds
flow out
Currency
appreciates
Currency
depreciates
Real interest rates are higher than in other countries
Risk of civil war
Business taxes are raised above world average
X
Expected stock market returns are better than elsewhere
Inflation increases
A large deposit of rare earth minerals is discovered
Rapidly growing manufacturing sector imports more foreign raw materials
3. Explain the historical exchange rates of the Argentine Peso to the US dollar using information from the 2 charts below. Use care to correctly interpret the charts. Original data is available, though not needed, from the websites listed below