Unit 1: Determination of Exchange Rates,
Exchange Rate Calculations
DETERMINATION OF EXCHANGE PRICES→ ‘’The Equilibrium
Exchange Rate’’
Different uses of foreign currency:
1. International trade
Export transactions
the direct market between major currencies→ same quota
cross-market between minor currencies→ making multiple exchanges
Import transactions
international trade (%20)→ delay of delivery
EU Central banks sell some extent of their treasury securities and bonds to the public to decrease
money in circulation→ depreciate the value of the currency
other ways: change interest rate, increase or decrease reserve ratio to keep some money
investing abroad (%80)→ get money directly (specifically with securities such as bonds and stocks)
2. Investing abroad
3. Hedging (minimizing the risks)
4. Speculation (gambling)
Factors determining prices (free market) Four additional macroeconomic factors
1. Tastes and Preferences 1. Relative inflation rates: Negative correlation
2. Prices of substitute: positive correlation 2. Relative real interest rates (nominal interest -
inflation): Positive correlation→ attractive for
3. Income level: (inferior, normal, superior goods)
investors
4. Population size: more people= price increases
3. Relative levels of economic growth (GDP rate
5. Expectations: if the price is expected to rise, etc.): Positive correlation
demand rises
4. Relative levels of economic and political risks:
Creates uncertainty→Negative correlation
Why high relative economic growth is attractive? High profitability and low uncertainty
✅ NOTE: Until the emerging economy becomes industrial
Import>Export→ NET IMPORTANCE→ More value in currency
Unit 1: Determination of Exchange Rates, Exchange Rate Calculations 1
, How can a government decrease the value of its currency? Sell the local currency to the major banks→ to stay
competitive in favor of export
CALCULATING EXCHANGE RATE CHANGES
Eight major currencies
USD (American Dollars) JPY (Japanese Yen)
EUR (Euro) CAD (Canadian Dollar)
GBP (British Pound) AUD (Australian Dollar)
CHF (Swiss Franc) HKD (Hong-Kong Dollar)
Formula for percentage change (used for Formula for annual percentage change:
any percent changes→ total change):
Annualperc.change = (t√ new/old − 1) ∗ 10
P erc.change = (New − Old)/Old ∗ 100
✅ NOTE: Rate of appreciation is always >
✅ NOTE: To check out the other side of the
currency rate, invert the first rate by taking
depreciation rate its reciprocal ex: USD/EUR: 0.8177
EUR/EUR: 1/ 0.8177
Unit 1: Determination of Exchange Rates, Exchange Rate Calculations 2
Exchange Rate Calculations
DETERMINATION OF EXCHANGE PRICES→ ‘’The Equilibrium
Exchange Rate’’
Different uses of foreign currency:
1. International trade
Export transactions
the direct market between major currencies→ same quota
cross-market between minor currencies→ making multiple exchanges
Import transactions
international trade (%20)→ delay of delivery
EU Central banks sell some extent of their treasury securities and bonds to the public to decrease
money in circulation→ depreciate the value of the currency
other ways: change interest rate, increase or decrease reserve ratio to keep some money
investing abroad (%80)→ get money directly (specifically with securities such as bonds and stocks)
2. Investing abroad
3. Hedging (minimizing the risks)
4. Speculation (gambling)
Factors determining prices (free market) Four additional macroeconomic factors
1. Tastes and Preferences 1. Relative inflation rates: Negative correlation
2. Prices of substitute: positive correlation 2. Relative real interest rates (nominal interest -
inflation): Positive correlation→ attractive for
3. Income level: (inferior, normal, superior goods)
investors
4. Population size: more people= price increases
3. Relative levels of economic growth (GDP rate
5. Expectations: if the price is expected to rise, etc.): Positive correlation
demand rises
4. Relative levels of economic and political risks:
Creates uncertainty→Negative correlation
Why high relative economic growth is attractive? High profitability and low uncertainty
✅ NOTE: Until the emerging economy becomes industrial
Import>Export→ NET IMPORTANCE→ More value in currency
Unit 1: Determination of Exchange Rates, Exchange Rate Calculations 1
, How can a government decrease the value of its currency? Sell the local currency to the major banks→ to stay
competitive in favor of export
CALCULATING EXCHANGE RATE CHANGES
Eight major currencies
USD (American Dollars) JPY (Japanese Yen)
EUR (Euro) CAD (Canadian Dollar)
GBP (British Pound) AUD (Australian Dollar)
CHF (Swiss Franc) HKD (Hong-Kong Dollar)
Formula for percentage change (used for Formula for annual percentage change:
any percent changes→ total change):
Annualperc.change = (t√ new/old − 1) ∗ 10
P erc.change = (New − Old)/Old ∗ 100
✅ NOTE: Rate of appreciation is always >
✅ NOTE: To check out the other side of the
currency rate, invert the first rate by taking
depreciation rate its reciprocal ex: USD/EUR: 0.8177
EUR/EUR: 1/ 0.8177
Unit 1: Determination of Exchange Rates, Exchange Rate Calculations 2
