FOREIGN EXCHANGE AND INTERNATIONAL FINANCIAL MARKETS.doc

CHAPTER 7
Foreign Exchange and International Financial Markets
After studying this chapter, students should be able to:
Describe how demand and supply determine the price of foreign exchange.
Discuss the role of international banks in the foreign-exchange market.
Assess the different ways that firms can use the spot and forward markets to settle international transactions.
Summarize the role of arbitrage in the foreign-exchange market.
Discuss the important aspects of the international capital market.
LECTURE OUTLINE
OPENING CASE: Dollar Makes Canada a Land of the Spree
This case discusses the impact the weak Canadian dollar has had on cross-border business between the US and Canada. As the Canadian dollar has dropped in value against the US currency, Americans have been able to buy more and more Canadian goods for the same amount of US dollars.
Key Points
The Canadian dollar (known as the "loonie") has been declining in value against the US dollar for several years, recently trading at less than 70 cents US per Canadian dollar.
Though the US dollar has been gaining value against several currencies, Canada's proximity makes it an attractive shopping destination for Americans.

panies are able to acquire Canadian firms at better prices.
Mail order and shopping let Americans shop for Canadian bargains without even leaving home.
The weak Canadian dollar is good for Canadian exporters, who find it easier to sell their goods.
Canadian consumers are the losers, as American imports and trips abroad have e increasingly more expensive.
CHAPTER SUMMARY
Chapter Seven introduces the student to the practical aspects of the foreign-exchange market. The chapter discusses how currency prices are determined, the role and activities of international banks in the foreign-exchange markets, how the spot and forward markets are used in international trade transactions, arbitrage in the foreign-exchange markets, and issues relating to the international capital mark