EECS 1710 Lecture 16: EECS 1710 Lecture 16 Notes
24 Jun 2018
School
Course
Professor
EECS 1710 Lecture 16 Notes
Introduction
Financial flow
There are distinct international trade and financial flows between every pair of
countries.
These flows dictate the unique supply and demand conditions for these two countries’
currencies, conditions that affect movements in the equilibrium exchange rate between
them.
The value of the British pound in Swiss francs (from a U.S. perspective, this is a cross
exchange rate) is influenced by the Swiss demand for pounds and the supply of pounds
to be exchanged (by British consumers and firms) for Swiss francs.
The movement in a cross exchange rate over a particular period can be measured as its
percentage change in that period, just as demonstrated previously for any currency’s
movement against the dollar.
You can measure the percentage change in a cross exchange rate over some time period
even when you lack cross exchange rate quotations
EXAMPLE
One year ago, you observed that the British pound was valued at $1.54 while the Swiss
franc (SF) was valued at $.78.
Today, the pound is valued at $1.60 and the Swiss franc is worth $.80.
This information allows you to determine how the British pound changed against the
Swiss franc over the last year
Cross rate of British pound one year ago ¼ 1.482=.78 ¼ .1:9½£1 ¼ SF1.9
Cross rate of British pound today ¼ 1.50=.75 ¼ 2.0½£1 ¼ SF2.0
Percentage change in cross rate of British pound ¼ ð2.0 1.9Þ=1.9 ¼ .05263.
Thus, the British pound depreciated against the Swiss franc by about 5.26 percent over
the last year
Document Summary
There are distinct international trade and financial flows between every pair of countries. These flows dictate the unique supply and demand conditions for these two countries" currencies, conditions that affect movements in the equilibrium exchange rate between them. Today, the pound is valued at . 60 and the swiss franc is worth $. 80. Thus, the british pound depreciated against the swiss franc by about 5. 26 percent over the last year. The cross exchange rate changes when either currency"s value changes against the dollar. These relationships are illustrated in exhibit 4. 9. Flows dictate the unique supply and demand conditions for these two countries" currencies, conditions that affect movements in the equilibrium exchange rate between them. The movement in a cross exchange rate over a particular period can be measured as its percentage change in that period, just as demonstrated previously for any currency"s movement against the dollar.
