CSUN NewSight Consulting Analyze Data with Tables & What if Tools Excel Worksheet See the instructions inside the folder, everything is insideIf you have a

CSUN NewSight Consulting Analyze Data with Tables & What if Tools Excel Worksheet See the instructions inside the folder, everything is insideIf you have any questions let me know Floating Exchange
Rates
Money Into Other Money
Exchange Rate
The rate, ratio or price at which one currency trades
or exchanges for another currency.
Say you want to buy a British car, a Land Rover for example.
You go to your local dealer and you buy the car in US Dollars.
The dealer, however, has to pay the car’s British manufacturer in
British Pounds – GBP (£).
The manufacturer wants British Pounds because they pay their
workers, their rent, their British suppliers and, of course, their
taxes in British Pounds.
How does the car dealer, to whom you paid US Dollars, get
British Pounds?
Sell US Dollars/Buy
British Pounds
Let’s say the car dealer needs to pay the auto manufacturer GB
£100,000. How does the dealer pay the manufacturer?
The dealer will go to the bank and ask the bank to send GB
£100,000 to the manufacturer.
The bank will go into the Foreign Exchange Market (the market
where currencies are bought and sold) and buy GB £100,000.
How does the bank buy British Pounds?
They buy British Pounds by selling US Dollars.
(The official name is Great Britain Pounds or GBP and the
symbol is £. But the common term is British Pounds. This
presentation uses all of these interchangeably. Learning things
like this is part of learning the language of foreign currencies.)
What Is The Price?
Both the US Dollar and the British Pound are freely
floating currencies.
The price of a floating currency changes based on
supply and demand of the currency. The price can
change several times in a day, but usually not by
much.
For floating currencies, the Foreign Exchange Market
works like any other supply and demand driven
market.
BUT What IS The Price?
It is what the market says it is at the time the bank
wants to buy GB £100,000.
For example, if 1 US $ = GB £0.58 (the actual exchange
rate on July 1, 2014);
Then, to buy GB £100,000 will cost US $172,413.79
(100,000/.58).
The bank will pay the auto manufacturer GB £100,000
and deduct US $172,413.79 from the account of the
auto dealer.
What About The Other
Way Around?
It works the same way – basically.
A British bank, say Barclays (they loaned Thomas
Jefferson the money so the US could make the
Louisiana Purchase), wants to buy computer routers
from Cisco, a US company.
Barclays tells Cisco what it needs and asks for a price.
Cisco tells Barclays that the routers will cost US
$100,000.
What Happens Next?
Since Barclay’s is a bank, it goes directly into the foreign
exchange market and demands (offers to buy) 100,000 US
Dollars from whomever has US Dollars and wants to have
GB Pounds.
In other words, Barclay’s offers to supply (sell) British
Pounds and to buy (demand) US Dollars.
The Land Rover dealership had their bank do the same
thing, only they were offering to supply (sell) US Dollars in
exchange for (buy or demand) GB Pounds.
Like any market, there has to be a buyer and a seller in
order to make an exchange.
So? What’s The Price?
Using the same exchange rate: 1 US $ = GB £0.58;
Barclay’s will go into the foreign exchange market
and pay GB £58,000 and receive in return US $100,000
(100,000 X .58).
Which Barclay’s will pay to Cisco for the routers.
Cisco wants US Dollars for the same reasons that
Land Rover wanted British Pounds.
Two Things Happen To Make One
Thing Happen
All international trade involve two separate but mutually
dependent exchanges.
First, there is the goods trade. Someone in one country
buys a good from someone else in another country.
Second, the currencies are traded. The buyer pays in
his/her domestic currency, but the seller wants to be paid
in his/her domestic currency.
Thus, foreign exchange rates are born. And international
trade occurs.
What Changes The
Exchange Rate?
For a floating currency, and all the major currencies
(except the Chinese Yuan) are floating currencies, the
exchange rate changes in response to changes in the
supply of and the demand for the currency.
Say, Australian businesses start to buy more goods and
services from the US. That means that Australian imports
from the US have increased.
To pay for the increased imports, the Australians will have
to sell (supply) more Australian Dollars (AU$) and buy
(demand) more US Dollars.
You see why we can’t just say “dollars”, we have to specify
the country as well.
Supply and Demand
Remember what you know about supply and
demand?
When the demand for anything increases, the price
increases.
When the supply increases, the price decreases.
What has happened in the US – Australian example?
How has the exchange rate changed?
The Exchange Rate
Changes
When the Australian demand for US$ increased (because
of the increased imports from the US), more AU$ were
supplied to the foreign exchange market to pay for the
US$ demanded by the Australians to pay for the increased
imports from the US.
The increased supply of Australian Dollars has caused the
price of the Australian Dollar to fall – depreciate – relative
to the US Dollar. Now it will take more AU$ to buy 1 US$.
This also means that the US Dollar has appreciated relative
to the Australian Dollar. Because it now takes fewer US$
to buy 1 AU$.
What Does This Mean
For The Yen?
Nothing!
Currencies appreciate (gain value) or depreciate (lose value) by
currency pair.
In the previous example, the US$ appreciated relative to the
AU$. And the AU$ depreciated relative to the US$.
This happens at the same time in the foreign exchange market.
Remember the price of one currency is the amount of another
currency that must be paid to obtain the first currency.
No other currencies were involved. Therefore, no other
exchange rates change because of the change in Australian
imports from the US.
But I Thought…
Yes, a currency can appreciate or depreciate relative
to multiple currencies at the same time.
Yes, a currency can appreciate relative to some
currencies while depreciating relative to other
currencies at the same time.
Which is why we study exchange rates by examining
one pair of countries at a time.
If we tried to examine all countries and currencies at
the same time, that would really get confusing!
Are These Strong
Currencies?
Yes, the US Dollar and the GB Pound are both strong currencies.
The British Pound is the stronger currency as 1 GB £ buys more US
Dollars than 1 US $ buys of GB Pounds. The exchange rate shows that.
It is actually a very stable exchange rate.
The Australian Dollar and the US Dollar are also both strong
currencies.
The exchange rate as of July 1, 2014 was 1.06 Australian Dollars for 1
US Dollar. So the Australian Dollar was slightly stronger than the
US Dollar on that date. But our example would change than and
make the US Dollar somewhat stronger than the Australian Dollar.
These two currencies tend to switch position a lot, but only within a
fairly narrow range. So their exchange rate is pretty stable.
¥
Like most things in the real world there is always a qualification. And here that is the
Japanese Yen (you see the symbol at the start of this paragraph). The Yen is a strong
currency, but it usually trades at about 100 Yen to 1 US Dollar. So don’t let the ratio mislead
you, as we’ll will see later, the strength of the economy plays an important role in exchange
rate determination. (Purchasing Power Parity plays a role also, but let’s not include that
yet.)
Key Points To
Remember
An exchange rate always involves two countries and two
currencies.
The exchange rate is the price of one currency in terms of
another currency.
When a currency appreciates, it gains value – will buy more
of another currency.
When a currency depreciates, it loses value – will buy less
of another currency.
When one currency in a currency pair appreciates the
other must depreciate – that’s the way the math works.
More Key Points
A strong currency is one that has a stable exchange rate.
Yes, the exchange rate changes, but it does not do so by
large amounts or very suddenly.
Strong currencies are normally ones issued by countries
that are politically stable and economically developed.
They are stable currencies issued by stable countries.
The major strong currencies are: the US Dollar, the Euro,
the British Pound, the Japanese Yen, the Swiss Franc, the
Canadian Dollar and the Australian Dollar. These are not
the only strong currencies, but they are the ones that are
most commonly used internationally.
Key Points Keep Coming
A weak currency is one that is subject to sudden and
often large changes in its’ exchange rate. These are
normally issued by developing countries many of
which are not very democratic in their governmental
structure.
Most of the world’s currencies are considered to be
weak currencies.
But The Assignment
Says…
Yes, the assignment says to select the US Dollar and another
currency of your choice (other than the Chinese Yuan);
Collect 12 months worth of exchange rate data (follow the
instructions on the course web site carefully);
Then, examine the 12 months worth of data and decide which
currency has appreciated over that period and which has
depreciated over that period.
Or have both happened?
Or has the exchange rate been mostly stable over the time
period with not a lot of change?
How Do I Do That?
Remember what we said about the number of units of a
currency needed to buy 1 unit of another currency?
Or looked at from the other side, how many units of a
currency will 1 unit of another currency buy?
These would be different numbers, but they are just two
different perspectives or views of the same currency
exchange.
You don’t need both sets of numbers to see how the
exchange rate is changing. Pick one view and observe
how those numbers change. The simplest thing is to
select the view the data gives you.
HUH??
OK, let’s take a fake example. Let’s look at the
exchange rate of the US Dollar and the Blogslovian
Blob.
To make this easier, the Blob is going to be a weak
currency that has sudden changes in its’ exchange
rate. Otherwise, the numbers require too many
decimals.
To make it easier, the changes will be predictable. That
is not always the case in the real world.
Blogslovian Blobs Per 1 US
Dollar: The Exchange Rate*
Month
1
2
3
4
5
6
7
8
9
10
11
12
Blobs
per US
$
50
20
0
40
30
20
70
150
200
50
60
60
50
It would seem that the Blob is not a very stable currency and isn’t worth a lot in
terms of US Dollars. But it ends the year in the same place that it began. So what
happened in between January and December? To know that we have to know more
about the Blogslovian economy.
But before we explore the Blogslovian economy, use the information in the table
above and calculate the US $ – Blob exchange rate for each month (1$/Blobs).
*1 Blob = 100 Slobs and 1 US Dollar = 100 Cents
Blogslovian Economy
Blogslovia is governed by its’ weather which is given
to extremes.
It is a mostly agricultural economy with a modest
amount of seasonal tourism – better hotels would
help.
So we will trace the Blogslovian economy through
the seasons and see how the economic activity in
each season impacts the demand for the Blob. And
how the Blogslovian demand for imports impacts the
supply of the Blob.
Winter In Blogslovia
December and January are good months for snow
which brings in a modest number of tourists. More
would come if the hotels weren’t so bad and the
roads worse.
February is all ice and sleet and the Blogslovians
would leave if they weren’t so poor and the roads so
bad.
So when the tourists come, the Blob appreciates,
when they leave in February and goods must still be
imported, the Blob depreciates.
Springtime in
Blogslovia!
But the Spring is lovely in Blogslovia.
Warm with enough rain to produce early and
continual harvests for fruits and vegetables.
During these months Blogslovia exports a lot of
agricultural products to the US and to Europe.
This increases the demand for the Blob and the Blob
appreciates!
Summer In Blogslovia
The Summers are horrid.
The winds bring in very hot and humid air from the
south.
The harvest season is over as the land dries up.
Nobody in the right mind comes to visit.
But goods must still be imported.
So the Blob depreciates.
Fall In Blogslovia
The Fall tends to be cool and dry as the winds once again
shift.
Apple trees and winter wheat produce agricultural
products for export.
But after the fall harvest, people mostly stay home and do
as little as possible.
So some exports occur with the harvest, but not much is
imported as people go home, sit by the fire ad consume
the national beverage: Slovia apple ale with wheat cakes.
What Is the Blob Doing?
For Blogslovina it depends on the season.
During the Spring Blogslovina’s exports are high and the
Blob appreciates.
During the Summer exports are almost none existence,
but imports are still needed, so the Blob depreciates.
During the Fall not much happens in the economy – some
exports and some imports, so the Blob is fairly stable.
During the Winter some tourists come to ski and that
causes the Blob to appreciate.
Simply Put:
When money flows into the country, the currency appreciates.
This can happen when exports exceeds imports, when more tourist
come to Blogslovia or when inflows of financial investment occur (not
that that last one happens much to poor Blogslovia)
When money flows out of the country, the currency depreciates.
This can happen when imports exceed exports, when Blogslovians go
to visit other countries (they wish) or when outflows of financial
investments occur.
It is the flow of money in all it’s forms and for all of it’s many
purposes that drives the demand and the supply of a currency and
thereby the currency’s exchange rate.
Money does make the world go around or at least the exchange
rates!
See, it is not that hard!
Now, Back To
Blogslovia!
Review the seasonal information about Blogslovia’s
economy.
For each season determine if more money is flowing into
the country than is flowing out of the country;
Or if more money is flowing out of the country than flowing
into it;
Or if about the same amount is flowing in as is flowing out.
Use that information to decide when you think the Blob is
appreciating , when it is depreciating and when it is
holding steady.
Compare what you project with the earlier table of
exchange rates by month.
Were You Right?
If so, then congratulations you have a good understanding of
how floating exchange rates work!
If not, go back to slide 1 and try again!
Either way, be sure you have a good understanding of:
What exchange rates are;
How floating exchange rates change and the role of supply and
demand in causing those changes;
How changes in imports and exports change the supply and the
demand for the two currencies involved.
Do all of this and then you will have a new and better
understanding, not only of how the world works, but of why
you pay what you do for so much of what you consume.
Intermission
This presentation has covered Floating Exchange Rates.
The floating system is the most important for
international trade purposes.
But it is not the only system of exchange rates. A separate
presentation will explore other approaches:
Managed Floats
Fixed Exchange Rates
Currency Pegs
Currency Boards
But that is for another day – perhaps tomorrow!

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