This document discusses currency exchange, including the Bretton Woods system, over-the-counter (OTC) markets, and vehicle currencies. It describes direct and indirect exchange rate mechanisms and lists market participants like banks, commercial companies, central banks, and hedge funds. Finally, it outlines determinants of exchange rates such as international parity conditions, balance of payments models, and asset market models as well as financial instruments used in currency exchange like spots, forwards, swaps, futures, and options.
6. DETERMINANTS OF EXCHANGE RATES
• International parity condition
• Balance of payment model
• Asset market model
7. ion,
Inc.
The relation Between the Current Dollar/Euro Exchange Rate
and the Expected Dollar Return on Euro Deposits
Today’s dollar/euro
exchange rate, E$/€
1.07
1.05
1.03
1.02
1.00
0.031 0.050 0.069 0.079 0.100
Expected dollar return on
euro deposits, R€ + (Ee$/€ -
E$/€)/(E$/€)
8. ion,
Inc.
Determination of the Equilibrium Dollar/Euro Exchange Rate
Exchange rate, E$/€
Return on
dollar deposits
E2$/€ 2
E1$/€ 1
3
E3$/€
Expected return
on euro deposits
R$ Rates of return
(in dollar terms)
9. ion,
Inc.
Effect of a Rise in the Dollar Interest Rate
Exchange rate, E$/€
Dollar return
E1$/€ 1 1'
E2$/€ 2
Expected
euro return
R1 R2$ Rates of return
$ (in dollar terms)
10. ion, In
c.
Effect of a Rise in the Euro Interest Rate
Exchange rate, E$/€
Dollar return
Rise in euro
interest rate
E2$/€ 2
E1$/€ 1
Expected
euro return
R$ Rates of return
(in dollar terms)
11. DETERMINANTS OF EXCHANGE RATES
• International parity condition
• Balance of payment model
• Asset market model