Foreign Exchange Market
- A market in which various national currencies are exchanged for one another. (this is the definition)
- The buying and selling of currency
- Ex: If you travel and want to buy souvenirs from Japan, you have to sell your Dollars to buy Yen.
Exchange rate - the equilibrium prices of currency in
these markets, determined in foreign currency exchange.
- Ex: If you sell $1.00, then you can buy ¥102.185.
2 Points
- A competitive market - real-world foreign exchange markets characterized by large numbers of buyers and sellers dealing in standardized products such as American’s dollars, European’s Euro, British’s Pound and Japanese Yen.
- Linkages to all domestic and foreign prices - the market price or exchange rate of a nation’s currency is an unusual price; it links all domestic prices with all foreign prices. Enable consumers to translate prices of foreign goods into units of their own currency.
Dollar-Yen Market
- U.S exports goods to Japan demand payment in dollar not Yen and vice-versa to Japan and they will exchange their currency in the foreign exchange market.
- Some U.S. importers need to pay the Japanese in exporters in Yen, so these people will demand for Yen.
- Because of the demand between two currency, we have “price” is in Dollars and the “product” is in Yen.
- If we show it on a graph of Supply and Demand the intersection of Demand Curve and Supply Curve establishes the equilibrium Dollar price of Yen.
Changing Rates : Depreciation and Appreciation
- Appreciation occurs when the exchange rate of a certain currency decreases.
- Depreciation occurs when the exchange rate of a certain currency increases.
- Ex: If the Japan products sell out more, then Yen will increases while the Dollars will decreases.
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