The forex market
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The FOREX market. When we trade goods and services internationally we need to use the currency of the country that we are importing from or exporting to. The Exchange rate is the price of one currency in terms of another The currencies of the world are traded in Foreign

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The FOREX market

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The forex market

The FOREX market

When we trade goods and services internationally

we need to use the currency of the country that we

are importing from or exporting to.

  • The Exchange rate is the price of one currency in terms of another

    The currencies of the world are traded in Foreign

    exchange markets (FOREX Markets).


The demand for nzd

The Demand for $NZD

  • The determinants of Demand for the NZ$ are:

  • Amount of exports sold

  • Number of tourists coming to NZ

  • Amount of investment in NZ by overseas investors

  • Income that NZers have earned from overseas investments returning to NZ.


The supply of the nzd

The Supply of the $NZD

  • The determinants of Supply for the NZ$ are:

  • The amount of imported goods and services

  • NZ tourists travelling overseas

  • NZers investing in overseas businesses

  • Repaying overseas loans


The forex market1

SNZ$

DNZ$

Q

The FOREX market

NZ$:US$

$0.77


Appreciation

Appreciation:

An increase in the value of the currency in terms of

the US$ i.e. going from $1 = 0.77US$ to

$1 = 0.81US$ is called an APPRECIATION of the

currency.

This happens if there has been an increase in the

demand for the currency (shifting the demand

curve to the right) or a decrease in the supply of

the NZ$ shifting the supply curve to the left.


Causes demand

Causes: Demand

  • An increase in demand for the NZ$ could be caused by an increase in the number of Tourists to NZ to see where the Lord of the Rings was filmed.

  • An increase in demand for the NZ$ could be caused by an increase in the number of investments in NZ.

  • An increase in demand for the NZ$ could be caused by an increase in the number of Exports sold overseas.


Causes supply

Causes: Supply

  • A decrease in the supply of the NZ$ could be caused by less NZers travelling overseas.

  • A decrease in the supply of the NZ$ could be caused by a decrease in the amount of NZers investing overseas.

  • A decrease in the supply of the NZ$ could be caused by a decrease in the amount of repayments of loans to overseas countries.


Depreciation

Depreciation

A decrease in the value of the currency in terms of

the US$ i.e. going from $1 = 0.77US$ to $1 =

0.65US$ is called a DEPRECIATION of the

currency.

This happens if there has been an decrease in the

demand for the currency (shifting the demand

curve to the left) or an increase in the supply of the

NZ$ shifting the supply curve to the right.


Causes demand1

Causes: Demand

  • A decrease in demand for the NZ$ could be caused by a decrease in the number of Tourists to NZ as a result of bad publicity about travel to NZ.

  • A decrease in demand for the NZ$ could be caused by a decrease in the number of investments in NZ by overseas firms.

  • A decrease in demand for the NZ$ could be caused by a decrease in the number of Exports sold overseas.


Causes supply1

Causes: Supply

  • An increase in the supply of the NZ$ could be caused by more NZers travelling overseas.

  • An increase in the supply of the NZ$ could be caused by an increase in the amount of NZers investing overseas.

  • An increase in the supply of the NZ$ could be caused by an increase in the amount of repayments of loans to overseas countries


Draw graphs to illustrate the following

Draw graphs to illustrate the following:

  • Fewer tourists travel to Fiji as a result of the instability in the country..

  • There is a rise in the demand by overseas buyers for NZ made boats as a result of the Americas cup

  • As a result of more Terrorism in the Middle East the price of Oil has risen

  • Fisher and Paykel decides to increase its investment in the United States

  • NZ sends more foreign aid to Darfur

  • NZ exports more to the UK as a result of a ‘Mad Cow’ disease outbreak

  • Exports to China decrease as a result of a political dispute between NZ and China over environmental issues


Exchange rate exercises

Exchange Rate Exercises:

1a. If the ER was $1 NZ to $0.55 US and the world price of

Lamb is $US 10 per lamb then the revenue earned from

the sale of a lamb in $NZ would be:

1b. If the exchange rate then depreciated to $1 NZ to $0.25

US the revenue would be

2a. If the world price of oil was $US 20 a barrel, the price of

Oil in $NZ if the exchange rate was $1 NZ to $0.55 US

Would be:

2b. If the ER was to depreciate to $1 NZ to $0.25 US the

price of a $20 Barrel of oil in NZ$ would be

$NZ18.18

$NZ40

$NZ 36.36

$NZ 80


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