Foreign Exchange Market

• Foreign Exchange: the buying or selling of currency

• The Exchange adage is determined in the foreign currency markets.

      -Ex: The current exchange rate is approximately 77 Japanese Yen to 1 US dollar.

• Simply put the exchange rate is the price of a currency

• Do not try to calculate the exact exchange rate.

Tips

• Always change the D line on one currency graph, the S like on the other currency's graph

• Move the lines of the two currency graphs in the same direction (right or left) and you will have the correct answer.

• If D on one graph increases, S on the other will also increase.

• If D moves to the left, S will move got the left on the other graph.

- Changes in Exchange Rates

• Exchange rates (e) are a function of the supply and demand for currency.

   - An increase in the supply of a currency will make it cheaper to buy one unit of that currency.

   - A decrease in supply of a currency will make a more expensive to buy one unit of that currency.

   - An increase in demand for a currency will make it more expensive to buy one unit of that currency

    - A decrease in demand for a currency will make it cheaper to buy one unit of that currency

- Appreciation

• Appreciation of a currency occurs when the exchange rate of that currency increases

     -Ex: 100 Yen used to buy $1.

                             Now 200 Yen buy 1US dollar.

     - The dollar is "stronger" because one buys more Yen than it used to.

- Depreciation of a currency occurs when the exchange rate of that currency decreases

       -100 Yen used to buy one dollar. Now 50

         Yen buys one dollar.

      - The dollar is weaker because it takes fewer Yen to buy one dollar.