Foreign Exchange is a commodity that consists of the currencies issued by countries other than one's own. Like the prices of other commodities, the price of foreign exchange - given a flexible exchange rate system - is set by demand and supply in the marketplace.
- Economists call this demand curve a derived demand curve because the demand for yen is derived from foreigner's desire to acquire Japanese goods, services, and assets.
- To buy Japanese goods, foreigner's first need to buy Japanese yen.
- As the price of yen falls, the quantity of yen demanded increases.
- Underlying the supply curve for yen is the desire by the Japanese to acquire foreign goods, services, and assets.
- To buy foreign products, Japanese needs to obtain foreign currencies, which they do by selling yen and using the proceeds to buy the foreign currencies.
- Selling yen has the effect of supplying yen to the foreign-exchange market.
- People offer more yen for sale as the price of the yen rises.
- The determination of the equilibrium price of yen.
- Point along the vertical axis show - how many dollars one must pay for each yen purchased.
- Point along the horizontal axis show the quantity of yen.
- Equilibrium price ($.009/yen in this case) and the equilibrium quantity demanded and supplied (200 million yen).
- Foreign-exchange rates are published daily in most major newspapers worldwide. In July 19, 2006, the direct exchange rate between the U.S. dollar and the yen (¥) on Wednesday, July 19, was $.008579/¥1. From the U.S. resident’s perspective, the indirect exchange rate on Wednesday, July 19, was ¥116.57/$1.
- Direct exchange rate (or direct quote) is the price of the foreign currency in term of the home currency.
- Indirect exchange rate (or indirect quote) is the price of the home currency in terms of the foreign currency.