PROCEDIMIENTO PARA TOMA DE DATOS

 A foreign exchange rate is the price of one currency in terms of another.

 A foreign exchange market is a market engaged in the buying and selling of foreign exchange.

 The leading markets are in London, New York and Tokyo.

 In SA the forex market is known as the interbank foreign exchange market. Differences in currencies

 A typical international transaction requires 2 distinct purchases:

o foreign currency is bought

o foreign currency is used to facilitate the international transaction  The market for a currency is just like the market for any product. There is

demand and supply.

 The exchange rate can be defined in 2 ways: The exchange rate is the domestic

price of foreign currency.

The exchange rate is the foreign price of domestic currency.

In the case of South Africa, this means that the price of a dollar, pound, euro and any other foreign currency is expressed in terms of rands (the domestic currency). For example, R5,00 = $1,00 means that the price of a dollar in terms of rands is R5,00.

In the case of South Africa, this means that the price of the rand (the domestic currency) is expressed in terms of dollars, pounds, euros and other foreign currency. For example, R1 = $0,20 means that the price of a rand in terms of dollars is 0,20 dollar.

This is known as the direct method of quoting the exchange rate.

This is known as the indirect method

of quoting the exchange rate.  Terms used to describe changes in exchange rates:

o An appreciation of a currency – an increase in the value of the domestic

currency related to the currencies of other countries, e.g. decrease in rand/dollar from R10,51 to R6,44

o A depreciation of a currency – a decrease in the value of the domestic currency relative to the currencies of other countries, e.g. increase in rand/dollar from R6,10 to R10,20.

The nature of demand and supply

 Demand for foreign exchange is determined by the following:

o importing goods

o services from foreign countries to the country concerned

o payments of interest and dividend on foreign capital

o payments of instalment on repayments of overseas loans

o transfer of capital to foreign countries

o tourists or representatives spending money in foreign countries

 The supply of foreign exchange is caused by the following:

o exporting goods

o providing services to foreign countries

o receiving interest and dividends on capital invested in foreign countries

o in flow of foreign capital

o expenditure of money by foreign powers and tourists

o raising new loans in foreign countries

o other receipts of foreign currencies

The nature of supply and demand for foreign currency:

The demand for dollars The supply of dollars People and institutions wishing to convert

rands into dollars. On the foreign

exchange market they supply rands and demand dollars. This is a result of:

 Payments for imports from the USA  Buying shares in USA firms

 Buying USA assets

 People wishing to visit the USA (tourists)

 Repaying debt borrowed from USA

People and institutions wishing to convert dollars into rands. On the foreign

exchange market they supply dollars and demand rands. This is a result of:

 Payments for exports from SA  Buying shares in SA firms  Buying SA assets

 People wishing to visit SA (tourists)  Repaying money borrowed from SA Changes in the exchange rate

 The exchanges rate changes whenever the demand or supply of foreign currency changes.

 The impact of a change in demand or supply on the exchange rate is as follows:

Change Impact on exchange rate

Increase in demand for foreign exchange Depreciate Decrease in demand for foreign exchange Appreciate Increase in supply of foreign exchange Depreciate Decrease in supply of foreign exchange Appreciate Interventions in the markets

 Government often intervene when a currency is either overvalue or undervalued:

o Overvalued: A country‘s currency is valued to high. E.g. ZAR is R6 rather than R7 to the US dollar. This happens when there are continuous deficits in the current account of the balance of payments.

o Undervalued: A country‘s currency is valued to low. E.g. ZAR is R8 rather than R7 to the US dollar. This happens if there are continuous surpluses in the current account of the balance of payments.

 Three methods of intervention:

o Free-floating exchange rate system – in this system the forces of supply and

demand determine the exchange rate and government does not intervene in the market with exchange rate fluctuations occurring as market conditions change. (Currently used in SA.)

o Fixed exchange rate system – under this system government fixes the

exchange rate at a certain level and then ensures that the exchange rate at the set level, requiring the government to buy or sell foreign exchange to maintain the exchange rate at the level it has set.

o Managed floating exchange rate system (direct intervention) – under this system the exchange rate is allowed to fluctuate between certain limits (set by government) as conditions of supply and demand change, government only intervene when the exchange rate moves outside the limits set by buying and selling foreign exchange. E.g. the central bank (SARB) whish‘s to maintain the exchange rate at R6 = $1. Assume further that an increase in demand of dollars take place. This could be because of an increase in demand of imported goods by SA households. In a floating exchange rate system the rand will therefore depreciate and the dollar will appreciate (R8 = $1). To stop this from happening the SARB can intervene in the following way:

The establishment of foreign exchange rates  Three exchange rate systems:

o Free-floating exchange rate

o Managed floating exchange rate

o Fixed exchange rate

 Terms of trade: The ratio of an index of the country‘s export prices to an index o fits import prices.

 Formula: Export price index X 100 Import price index

(Value of exports = price x quantity exported) (Value of imports = price x quantity imported)

 SARB QB publishes the term of trade, it is also an index.  E.g.

Year

Exports Imports Terms of trade

Excluding gold Including gold

Volume Price Volume Price Volume Price Excluding gold Including gold 1996 1997 1998 1999 2000 2001 2002 2003 2004 80.2 84.9 89.5 91.9 100.0 102.7 103.2 103.0 106.3 68.3 73.4 80.5 86.6 100.0 117.5 143.1 132.5 136.5 83.9 87.1 91.2 85.6 100.0 101.8 102.3 101.4 104.3 70.8 75.3 81.3 86.9 100.0 117.0 145.4 133.2 136.2 95.9 101.6 103.6 94.9 100.0 100.2 105.1 114.1 128.7 65.5 68.9 76.4 84.8 100.0 115.5 140.3 124.2 125.7 105.1 106.6 105.5 102.3 100.0 101.7 102.0 106.8 108.7 108.9 109.3 106.6 102.6 100.0 101.2 103.6 107.3 108.5

Source: South African Reserve Bank, Quarterly Bulletin, March 2005

 An improvement in the terms of trade may be the result of the following:

o An increase in export prices

o A decrease in import prices

 A deterioration (decrease) in the terms of trade may be the result of the following:

o A decease in export prices

o An increase in import prices

 The two most important reasons for price changes in exports and imports are:

o Inflation or deflation

SECTION C: HOMEWORK

TOPIC 1: BALANCE OF PAYMENTS

QUESTION 1: 14 minutes

Study the table below and answer the questions that follow: Current account

Merchandise exports Net gold exports Service receipts Income receipts

Less: Merchandise imports Less: Payments for services Less: Income payments Current transfers (net receipts) Balance on current account

380 950 25 340 85 050 29 300 420 600 75 000 55 300 -11 350 ?

1.1 Calculate the trade balance. (8)

1.2 Calculate the balance on the current account. (3) 1.3 What is the purpose of the balance of payments? (3)

1.4 What does SDR stand for? (3)

1.5 Name three items that are reflected under direct investments. (6) [23]

QUESTION 2: 16 minutes (Source: Focus Study Guide)

2.1 Define the term ‗Balance of Payments Account‘. (4)

2.2 Explain the current account. (8)

2.3 Explain what is meant by the term ‗trade balance‘. (6)

2.4 Explain the financial account. (8)

[26] TOPIC 2: FOREIGN EXCHANGE MARKET

QUESTION 1: 5 minutes

Calculate the terms of trade for the following periods.

Year Index of export prices Index of import prices

2006 104 96

2007 103 98