Unit 7: Foreign Exchange pt. 2 (4/27)

Purchasing Power Parity: When the currency rates are set by international markets, changes will be based on the actual purchasing power of the currencies. 

For example, if the U.S. dollar to the European Euro is $1.50 to 1, then each $1.50 will buy 1 Euro. However, if an item in the US costs $1.50 and then costs more or less than 1 Euro, the parity is lost. Markets will adjust quickly in floating rates or pressure for change will occur in fixed rates. 

Why do we exchange currencies?

1) To invest in other countries' stocks and bonds

2) To sell exports and buy imports

3) To build factories or stores in other markets

4) To hold currencies in bank accounts for future imports, exports, or business loans

5) To speculate on currency values 

6) To control excessive imbalances