Mechanics Of Foreign Exchange (FOREX)

Mechanics Of Foreign Exchange (FOREX)

• Buying/Selling of Currency
• Any transaction that occurs in the balance of payments necessitates foreign exchange
• The foreign exchange rate (e) is determined in the foreign currency markets
• -exchange rate is the price of a currency-

Changes in Exchange Rates

• Exchange rates (e) are function of supply/demand for currency
• An increase in supply of currency will decrease exchange rate of currency.
• Decrease in supply will increase exchange rate
• Increase in demand will increase exchange rate
• Decrease in demand will decrease exchange rate

Appreciation and Depreciation

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

Exchange Rate Determinants

1. Consumer Taste
2. Relative Income
3. Speculation

Exports/Imports

• Exchange rate is determinant of both exports and imports
• Appreciation of the dollar causes American goods to be relatively more expensive and foreign goods to be relatively cheaper thus reducing exports and increasing imports
• Depreciation- relatively cheaper and foreign goods more expensive, increases exports, decreases imports