3 main entities that trade currencies (in descending order of volume)
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1. Financial investors (buying/selling securities in foreign currencies, 45% of
volume)
2. Corporations (conducting global business selling goods/services across
borders.)
3. Travelers (business/leisure trips leading to change currency for personal
use)
When money supply of one currency expands more than that of another,
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, the first will depreciate against the second all else being equal. Surprise
rises in inflation will usually weaken a currency. Happens when central bank
prints a lot more money.
Trade-weighted baskets
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Indices which calculate aggregate value of one currency against its main
trading partners (larger trading partners weighted more heavily)
Law of One Price
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In the long run, identical goods and services should cost the same no
matter where they are sold around the world.
In 1986, The Economist released the Big Mac Index, price of Big Macs in
capitals of the world. Swiss franc may be 26% overvalued.
Dealing with currencies used to be straightforward because
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1. Financial investors (buying/selling securities in foreign currencies, 45% of
volume)
2. Corporations (conducting global business selling goods/services across
borders.)
3. Travelers (business/leisure trips leading to change currency for personal
use)
When money supply of one currency expands more than that of another,
Give this one a try later!
, the first will depreciate against the second all else being equal. Surprise
rises in inflation will usually weaken a currency. Happens when central bank
prints a lot more money.
Trade-weighted baskets
Give this one a try later!
Indices which calculate aggregate value of one currency against its main
trading partners (larger trading partners weighted more heavily)
Law of One Price
Give this one a try later!
In the long run, identical goods and services should cost the same no
matter where they are sold around the world.
In 1986, The Economist released the Big Mac Index, price of Big Macs in
capitals of the world. Swiss franc may be 26% overvalued.
Dealing with currencies used to be straightforward because
Give this one a try later!
