foreign exchange rates
DESCRIPTION
FOREIGN EXCHANGE RATES. Domestic Currency Units Direct Rate = Foreign Currency Unit for example, USD 0.7948/C$. FOREIGN EXCHANGE RATES. Foreign Currency Units Indirect Rate = Domestic Currency Unit for example, Mex$ 10.966/USD. FOREIGN EXCHANGE RATES. - PowerPoint PPT PresentationTRANSCRIPT
FOREIGN EXCHANGE RATES
Domestic Currency UnitsDirect Rate =
Foreign Currency Unit
for example, USD 0.7948/C$
FOREIGN EXCHANGE RATES
Foreign Currency UnitsIndirect Rate =
Domestic Currency Unit
for example, Mex$ 10.966/USD
FOREIGN EXCHANGE RATESCross (Inferred) Rate
If we know the rate of exchange between U.S. dollars and Canadian dollars, as well as the exchange rate between US dollars and Mexican pesos, we can infer the exchange rate between Canadian dollars and Mexican pesos:
USD 0.7948/C$ * Mex$10.966/USD
= Mex$8.7158/C$
LATERAL ARBITRAGE
Canada
Mexico
United StatesMex$8.869/C$
Mex$10.966/USD
USD 0.7948/C$
LATERAL ARBITRAGE
Since the quoted rate between the Mexican peso and the Canadian dollar is higher than it should be, we want to sell at that quoted rate.
USD 0.7948/C$*Mex$10.966/USD<Mex$8.869/C$
LATERAL ARBITRAGE
USD 1,000,000
divided by USD 0.7948/C$
C$ 1,258,178
times Mex$ 8.869/C$
Mex$11,158,782
divided by Mex$10.966/USD
USD 1,017,580
LATERAL ARBITRAGE
The market forces created by arbitrage activities exert pressures on the exchange rates that drive them to equilibrium (within transactions costs):
USD 0.7948/C$ * Mex$10.966 < Mex$8.869/C$
LAW OF ONE PRICE
With free trade, identical goods will tend toward a single, worldwide price (adjusted for transportation costs, duties, etc.)
t t tP = P * X d f
PURCHASING POWER PARITY
If the Law of One Price Holds in all periods
t+1 t+1 t+1P = P * X d f
t t tP = P * X d f
PURCHASING POWER PARITY
t+1 X
1+infl = (1+infl ) d f t X
or
t+1 t (1+infl ) X = X * d (1+infl ) f
CANADIAN/US DOLLAR EXCHANGE RATE (C$/USD)
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
Jan-
76Ja
n-77
Jan-
78Ja
n-79
Jan-
80Ja
n-81
Jan-
82Ja
n-83
Jan-
84Ja
n-85
Jan-
86Ja
n-87
Jan-
88Ja
n-89
Jan-
90Ja
n-91
Jan-
92Ja
n-93
Jan-
94Ja
n-95
Jan-
96Ja
n-97
Jan-
98Ja
n-99
Jan-
00Ja
n-01
Jan-
02Ja
n-03
Jan-
04Ja
n-05
Nominal Exchange Rate Real Exchange Rate
PERCENTAGE DEVIATION FROM PURCHASING POWER PARITY OF CANADIAN
DOLLAR
-40%
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
Jan-
76Ja
n-77
Jan-
78Ja
n-79
Jan-
80Ja
n-81
Jan-
82Ja
n-83
Jan-
84Ja
n-85
Jan-
86Ja
n-87
Jan-
88Ja
n-89
Jan-
90Ja
n-91
Jan-
92Ja
n-93
Jan-
94Ja
n-95
Jan-
96Ja
n-97
Jan-
98Ja
n-99
Jan-
00Ja
n-01
Jan-
02Ja
n-03
Jan-
04Ja
n-05
Deviation from PPP
CANADIAN NET TRADE BALANCE WITH THE UNITED STATES
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
Jan-
76Ja
n-77
Jan-
78Ja
n-79
Jan-
80Ja
n-81
Jan-
82Ja
n-83
Jan-
84Ja
n-85
Jan-
86Ja
n-87
Jan-
88Ja
n-89
Jan-
90Ja
n-91
Jan-
92Ja
n-93
Jan-
94Ja
n-95
Jan-
96Ja
n-97
Jan-
98Ja
n-99
Jan-
00Ja
n-01
Jan-
02Ja
n-03
Jan-
04Ja
n-05
Net Trade Balance
MEXICAN PESO/US DOLLAR EXCHANGE RATE (Mex$/USD)
0
2
4
6
8
10
12
14
Jan-
76Ja
n-77
Jan-
78Ja
n-79
Jan-
80Ja
n-81
Jan-
82Ja
n-83
Jan-
84Ja
n-85
Jan-
86Ja
n-87
Jan-
88Ja
n-89
Jan-
90Ja
n-91
Jan-
92Ja
n-93
Jan-
94Ja
n-95
Jan-
96Ja
n-97
Jan-
98Ja
n-99
Jan-
00Ja
n-01
Jan-
02Ja
n-03
Jan-
04Ja
n-05
Nominal Exchange Rate Real Exchange Rate
PERCENTAGE DEVIATION FROM PURCHASING POWER PARITY OF MEXICAN
PESO
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
Jan-
76Ja
n-77
Jan-
78Ja
n-79
Jan-
80Ja
n-81
Jan-
82Ja
n-83
Jan-
84Ja
n-85
Jan-
86Ja
n-87
Jan-
88Ja
n-89
Jan-
90Ja
n-91
Jan-
92Ja
n-93
Jan-
94Ja
n-95
Jan-
96Ja
n-97
Jan-
98Ja
n-99
Jan-
00Ja
n-01
Jan-
02Ja
n-03
Jan-
04Ja
n-05
Deviation from PPP
MEXICAN NET TRADE BALANCE WITH THE UNITED STATES
-1,000
0
1,000
2,000
3,000
4,000
5,000
6,000
Jan-
76Ja
n-77
Jan-
78Ja
n-79
Jan-
80Ja
n-81
Jan-
82Ja
n-83
Jan-
84Ja
n-85
Jan-
86Ja
n-87
Jan-
88Ja
n-89
Jan-
90Ja
n-91
Jan-
92Ja
n-93
Jan-
94Ja
n-95
Jan-
96Ja
n-97
Jan-
98Ja
n-99
Jan-
00Ja
n-01
Jan-
02Ja
n-03
Jan-
04Ja
n-05
Net Trade Balance
MEXICAN PESO/CANADIAN DOLLAR EXCHANGE RATE (Mex$/C$)
0
1
2
3
4
5
6
7
8
9
10
Jan-
76Ja
n-77
Jan-
78Ja
n-79
Jan-
80Ja
n-81
Jan-
82Ja
n-83
Jan-
84Ja
n-85
Jan-
86Ja
n-87
Jan-
88Ja
n-89
Jan-
90Ja
n-91
Jan-
92Ja
n-93
Jan-
94Ja
n-95
Jan-
96Ja
n-97
Jan-
98Ja
n-99
Jan-
00Ja
n-01
Jan-
02Ja
n-03
Jan-
04Ja
n-05
Nominal Exchange Rate Real Exchange Rate
PERCENTAGE DEVIATION FROM PURCHASING POWER PARITY OF MEXICAN
PESO vs. CANADIAN DOLLAR
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
Jan-
76Ja
n-77
Jan-
78Ja
n-79
Jan-
80Ja
n-81
Jan-
82Ja
n-83
Jan-
84Ja
n-85
Jan-
86Ja
n-87
Jan-
88Ja
n-89
Jan-
90Ja
n-91
Jan-
92Ja
n-93
Jan-
94Ja
n-95
Jan-
96Ja
n-97
Jan-
98Ja
n-99
Jan-
00Ja
n-01
Jan-
02Ja
n-03
Jan-
04Ja
n-05
Deviation from PPP
MEXICAN NET TRADE BALANCE WITH CANADA
-
200,000
400,000
600,000
800,000
1,000,000
1,200,000
Jan-
00A
pr-0
0Ju
l-00
Oct
-00
Jan-
01A
pr-0
1Ju
l-01
Oct
-01
Jan-
02A
pr-0
2Ju
l-02
Oct
-02
Jan-
03A
pr-0
3Ju
l-03
Oct
-03
Jan-
04A
pr-0
4Ju
l-04
Oct
-04
Jan-
05
Ca
na
dia
n D
olla
rs
Net Trade Balance
Questions?