EECS 3101 Lecture Notes - Lecture 21: Pound Sterling
28 Jun 2018
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EECS 3101 Lecture 21 Notes
Introduction
Exchange rate equilibrium
A review of daily exchange rate movements is important to an MNC that will need to
obtain a foreign currency in a few days and wants to assess the possible degree of
movement over that period.
A review of annual exchange movements would be more appropriate for an MNC that
conducts foreign trade every year and wants to assess the possible degree of
movements on a yearly basis.
Many MNCs review exchange rates based on both short- and long-term horizons
because they expect to engage in international transactions in both the near and distant
future.
Although it is easy to measure the percentage change in a currency’s value, it is more
difficult to explain why the value changed or to forecast how it may change in the
future.
To achieve either of these objectives, the concept of an equilibrium exchange rate must
be understood in addition to the factors that affect this rate.
Before considering why an exchange rate changes, recall that an exchange rate (at a
given time) represents the price of a currency, or the rate at which one currency can be
exchanged for another.
The exchange rate always involves two currencies, but the focus in this text is the U.S.
perspective.
So unless specified otherwise, the exchange rate of any currency is the rate at which it
can be exchanged for U.S. dollars.
Like any other product sold in markets, the price of a currency is determined by the
demand for that currency relative to its supply.
Thus, for each possible price of a British pound, there is a corresponding demand for
pounds and a corresponding supply of pounds for sale (to be exchanged for dollars).
Document Summary
A review of daily exchange rate movements is important to an mnc that will need to obtain a foreign currency in a few days and wants to assess the possible degree of movement over that period. Like any other product sold in markets, the price of a currency is determined by the demand for that currency relative to its supply. Thus, for each possible price of a british pound, there is a corresponding demand for pounds and a corresponding supply of pounds for sale (to be exchanged for dollars). Daily exchange rate movements is important to an mnc that will need to obtain a foreign currency in a few days and wants to assess the possible degree of movement over that period. A review of annual exchange movements would be more appropriate for an mnc that conducts foreign trade every year and wants to assess the possible degree of movements on a yearly basis.
