ECON231 Lecture Notes - Lecture 3: Utah Transit Authority, Arbitrage, Interest Rate

• School: University of Waterloo
• Department: Economics
• Course: ECON231
• Professor: Jean Forand

Document Summary

Exchange rates = quoted as foreign current per unit of domestic currency. Depreciation decrease in value of a currency relative to another: makes imports more expensive, and exports cheaper, depreciated currency lowers the price of exports relative to the price of imports, vice versa for appreciation. Technology made information readily available and created integrated markets: no significant differences in exchange rates across locations -> no arbitrage opportunities. Spot rate exchange rate for curre(cid:374)c(cid:455) e(cid:454)cha(cid:374)ges (cid:862)o(cid:374) the spot(cid:863) or whe(cid:374) tradi(cid:374)g is e(cid:454)ecuted i(cid:374) the present. Forward rate e(cid:454)cha(cid:374)ge rate for curre(cid:374)c(cid:455) e(cid:454)cha(cid:374)ges that (cid:449)ill occur at a future (cid:862)for(cid:449)ard(cid:863) date. Foreign exchange swaps combination of a spot sale with a forward purchase: swaps allo(cid:449)s parties to (cid:373)eet each other"s (cid:374)eeds te(cid:373)porall(cid:455) a(cid:374)d ofte(cid:374) cost less i(cid:374) fees tha(cid:374) separate transactions. Futures contract designed by third party for a standard amount of foreign currency.