Finance Lecture Notes

In: Business and Management

Submitted By starmoon
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International Finance
S.O.E. – Small Open Economy
Foreign Exchange – a foreign country’s currency.
Exchange Rate: e, the “price” of a foreign currency. Eg. The price of 1 US dollar is $ CDN , e=$ CDN
Currency Appreciation: The value of a currency rises relative to other currencies. – e falls. (the price of foreign currency falls)
Currency Depreciation: a currency’s value falls. – e rises.

Case 1
Spring break

Case 2
“Hollywood North” grows

Exchange Rate Regimes
Fixed Exchange Rate Regimes * The external value of the currency is set at a certain level. * Pegged to the price of gold. (“Gold Standard”)
- Bahamas -Panama
In order to maintain the value of the currency at the predetermined level, the Bank of Canada must intervene regularly in the foreign exchange market. * Canada: 1962- 1970
Problem:
Can’t just set (“fix”) your currency at some desired rate.
Strong forces of S and D in international currency markets.
Suppose: Value of Canadian dollar rises.

BOC must step in and sell Cdn dollars in International Currency markets to offset the upward pressure on the currency.

Monetary policy is being used to support e at the desired level, at the expense of the domestic economy.
“Fixed exchange rates” policy requires adjustments of the Canadian money supply. * “becomes” Canada’s Monetary Policy.
A country Cannot use one policy instrument to influence two policy targets.
For example, Canada can use monetary policy to target interest rates or exchange rates, but NOT BOTH.

Flexible Exchange Rate Regime
Managed Float
The international value of the Canadian dollar is determined each day in the foreign exchange markets, but If e rises or falls Cdn $ appreciates Cdn $ depreciates. * By a large amount, or * Too quickly
The BOC will step in and stabilize the currency.…...

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