International Finance: Key Concepts and Study Guidance

Topic: Foreign Currency

• Foreign Currency: The money used in another country, different from the domestic currency.

Topic: Foreign Exchange Market

• Foreign Exchange Market (Forex or FX): The global marketplace where currencies are bought and sold. It enabled the conversion of. one currency to another, facilitating international trade and investement

Topic: Exchange Rate

• Exchange Rate: The price at which one currency can be exchanged for another

Topic: Currency Appreciation

• Appreciation: When the exchange rate appreciates, the domestic currency increases in value relative to foreign currencies....meaning you can buy more foreign currency with each unit of your domestic currency.

Topic: Currency Depreciation

• Depreciation: A decrease in the value of a currency relative to another currency....meaning you can buy LESS foreign currency with each unit of your domestic currency

Topic: Determination of Exchange Rates

• Supply and Demand: The exchange rate is set where the intersection of the supply and demand (Qd = Qs) for a currency in the foreign exchange market.

Topic: Demand for Domestic Currency

• Quantity Demanded: The quantity of U.S. dollars demanded in the foreign exchange market that buyers want to purchase to pay for U.S. goods, services, and assets at a given exchange rate.

• Determinants of Currency Demand:

  • U.S. exports of goods and services

  • U.S. interest rates relative to foreign interest rates

  • Expected future exchange rates

  • Foreign investment in U.S. assets