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Lesson 7 Foreign Exchange

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9 views

Lesson 7 Foreign Exchange

ibt

Uploaded by

trishajoytutana
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Lesson # 7.

Nature of
International Financing and
Financial Institutions
Lesson # 7. 1
Introductory
concepts on the
value of foreign
money

Image from:
https://corporatefinanceinstitute.com/resources/foreign-
exchange/foreign-exchange/
Nominal and Real Exchange Rates
Nominal Exchange Rate

🠶 the rate at which a person can trade the currency of one country for the
currency of another

🠶 Appreciation
🠶 an increase in the value of a currency as measured by the amount of foreign
currency it can buy

🠶 Depreciation
🠶 a decrease in the value of a currency as measured by the amount of foreign
currency it can buy
Real exchange rate

🠶 the rate at which a person can trade the goods and services of one
country for the goods and services of another

🠶 𝑅𝑒𝑎𝑙 𝑒𝑥𝑐ℎ𝑎𝑛𝑔𝑒 𝑟𝑎𝑡𝑒 = (𝑒 𝑥 𝑃)


𝑃∗

🠶 Where e is the nominal exchange rate , P is the local price index and P*
is the price index of foreign basket
Exchange Rates

The exchange rate is the price of a unit of foreign currency in terms of the
domestic currency. In the Philippines, for instance, the exchange rate is
conventionally expressed as the value of one US dollar in peso equivalent.
For example, US$1 = P50.00.

-BSP, 2020
Determinants of Demand for FOREX

🠶 domestic imports

🠶 domestic investors purchasing foreign assets

🠶 domestic tourists traveling abroad: Filipinos travel overseas for tourism or


for business

🠶 Import of products for utilization and investment.


Determinants of Supply for FOREX

🠶 Export earnings
🠶 foreign investors purchasing domestic assets
🠶 foreign tourists traveling to the domestic country
🠶 Use of services sold by Philippine companies: transport,
telecommunications, and others.
🠶 Remittances of OFW
🠶 Proceeds from foreign loans
Demand and Supply for FOREX
Importance of Exchange Rates
It serves as the basic link between the local and the overseas market for various
goods, services and financial assets. Using the exchange rate, we are able to compare
prices of goods, services, and assets quoted in different currencies

Exchange rate movements can affect actual inflation as well as expectations about
future price movements. Changes in the exchange rate tend to directly affect domestic
prices of imported goods and services

Exchange rate movements can affect the country’s external sector through its impact
on foreign trade.

The exchange rate affects the cost of servicing (principal and interest payments) on
the country’s foreign debt. A peso appreciation reduces the amount of pesos needed to
buy foreign exchange to pay interest and maturing obligations

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