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Currency
Currency
Currency
Devaluation of a currency
• refers to a decrease in the stated par value of a currency
whose value is fixed
• this decision is made by the government
Depreciation of a currency
• a decrease in the foreign exchange value of a floating
currency
• this is caused by market forces
revaluation of a currency
• refers to an increase in the stated par value of a currency
whose value is fixed
• this decision is made by the government
Solution:
appreciation of a currency • For the German executive, the cross rates are
• an increase, respectively, in the foreign exchange value determined:
of a floating currency
• this is caused by market forces
• Cancelling the dollar signs will get the number of euros
Foreign Exchange Rate Quotations that 1 yen could buy:
Direct quote • Finding the number of yen that 1 euro could buy:
• the number of units of domestic currency corresponding
or in equivalent to 1 unit of foreign currency
• home or domestic currency price of one unit of the foreign
currency.
• It is the norm in all countries, except in the Australia, UK,
New-Zealand, Canada and the Eurozone • The two cross rates are reciprocals of each other.
• Examples (for a Swiss Franc based investor):
o 0.99 CHF = 1 USD Trading in Foreign Exchange
o 1.08 CHF = 1 EUR • The Foreign exchange rate or the so-called Forex market
is the largest financial market.
Indirect quote
• the number of units of foreign currency corresponding or
in equivalent to 1 unit of domestic currency
• The foreign currency price of one unit of the home or
domestic currency.
• this is the norm in UK, New-Zealand, Australia, Canada
and the Eurozone
• Examples:
o 1 EUR = 1.09 USD
o 1 AUD = 0.71 USD
SPOT RATES AND FORWARD RATES
Spot rates Step 2: Solve
• rate paid for delivery of the currency “on the spot”
• in reality, no more than 2 days after the day of the trade
• Equation:
2. Eurobond market
• Eurobond
o An international bond underwritten by an
international syndicate of banks and sold to investors in
countries other than the one in whose money unit the bond
is denominated.
Gold market
Gold, as a financial asset, has been used as:
• Investment
• Store of value
• Money (either as coins or as backing to Fiat
currency systems like the gold standard)