Question

Foreign Exchange Markets

Example with francs and dollars :

1. Suppose the exchange rate between the Swiss franc and the dollar is $0.50 per franc. What would be the exchange rate if it is quoted as francs per dollar?

2. If you are contemplating buying a fancy Swiss watch that costs 1000 francs, how much will it cost you in dollars?

3. If a Swiss is contemplating buying an American pocket calculator that costs $100, how much will it cost him in francs?

4. If the exchange rate changes to $.25 per Swiss franc, has there been an appreciation or depreciation of the Swiss franc? ____ Of the dollar? ______

5. Now if you buy the Swiss watch that costs 1000 francs, how much will it cost you in dollars? ______

6. Now how much will it cost the Swiss in francs for the $100 pocket calculator?

7. What does the example indicate about the effect on prices of foreign goods in a country and domestic goods sold abroad when the exchange rate appreciates?

Answer 1

1. $1 = 1/0.50 franc = 2 franc
So, $1 = 2 francs
So, exchange rate is 2 francs per dollar.

2. 1 franc = $0.50
So, 1000 francs = $0.50*(1000) = $500

3. $1 = 2 francs
So, $100 = 2*(100) = 200 francs

4. Depreciation of the Swiss franc and appreciation of the dollar.
As 1 Franc can buy less dollar now so Franc has depreciated and thereby dollar has appreciated.

5. 1 franc = $0.25
So, $1 = 1/0.25 = 4 francs
1000 francs = $0.25*(1000) = $250

6. $1 = 4 francs
$100 = 4*(100) = 400 francs

7. When the exchange rate appreciates, price of foreign goods in a country falls and price of domestic goods sold abroad rise.