Courses : Intermediate Macroeconomics Lecturer : Frischa Adellia Semester : 4th Semester, 2022/2023 Sesion FOREIGN EXCHANGE RATE AND OFFERING PRICE The foreign exchange rate is the relative price between two currencies expressed in different currency units. In the foreign exchange market, each currency pair has a different exchange rate depending on factors such as a country's economic strength, interest rates, inflation, and other factors. For example, the USD/JPY currency pair shows how many yen one has to pay to buy one US dollar. If the USD/JPY exchange rate is 110, that means one US dollar is equivalent to 110 yen. The bid price in the foreign exchange market is the price at which buyers are willing to buy a currency pair, while the ask price is the price at which sellers are willing to sell a currency pair. The difference between the bid price and the bid price is called the spread. For example, if the EUR/USD bid price is 1.2000 and the bid price is 1.2002, then the spread is 2 pips. Spreads are usually a transaction cost in foreign exchange trading, and the smaller the spread, the better it is for traders as they save on transaction costs. When a trader wants to buy a currency pair, they have to pay the bid price. Conversely, when they want to sell a currency pair, they will receive the bid price. Bid and bid prices in the foreign exchange market are always fluctuating as demand and supply changes, so it is very important for traders to monitor price movements continuously in order to make informed trading decisions. This foreign exchange rate is always changing all the time. The underlying movement of the foreign exchange rate or (forex rate) is based on many things, including: 1. Devaluation/Depreciation and Revaluation/Appreciation Devaluation and depreciation is a decrease in the exchange rate of a certain country's currency against the value of another country's currency, where the depreciation of the decline is not too large and temporary while the devaluation of the decline is large and is usually announced officially by the government of the country concerned, and vice versa. 2. The face value and intrinsic value of the currency The value printed on the currency is called the nominal value / extrinsic value, while the intrinsic value is the value contained in that currency. themselves, for example the materials used to make the currency (paper, ink, manufacturing costs, and so on). 3. Balance of Payments Balance of Payment(BOP) this can be interpreted as a financial report from a country that describes cash flows in and out of or to other countries during a one-year period. In the case of BOP transactions, this can be divided into 2, namely transactions, namely credit transactions that give rise to an obligation to pay, for example an import transaction, while a debit transaction that gives rise to an inflow of money or the right to receive money, for example, an export transaction. 4. Foreign exchange reserves This foreign exchange reserve can be interpreted as the total funds of a country, whether in the form of money, liquid assets or other facilities in the form of foreign currency owned by a country's central bank. 5. Inflation Rate The inflation rate can be interpreted as the level of increase in the price of consumer goods that occurs in a certain period of time, usually expressed in percent per year. 6. Nominal Interest Rate The nominal interest rate is the prevailing interest rate in a country before deducting the inflation rate. 7. Real Interest Rate The real interest rate is the interest rate that applies in a country after deducting the country's inflation rate. There are several theories related to foreign exchange rates, including the following: 1. Balance of Payment Approach This opinion is based on the opinion that currency exchange rates are determined by the forces of supply and demand, where the instrument for measuring this is the Balance of Payment. If a country's BOP experiences a deficit, it can be interpreted that income (money inflow) is less than expenditure (money outflow), then the demand for other countries' currency will increase to pay for the deficit, the exchange rate will tend to decrease, and vice versa. So this theory tries to use BOP as the dominant factor that determines exchange rates. 2. Purchasing Power Parity Theory Unlike the previous approach, this theory relates currency exchange rates to purchasing power for goods or services, where it is assumed that goods are the same everywhere in the world, using the Law of One Price approach as the basis. The assumption is that two identical goods should have the same price anywhere in the world. 3. Fisher Effect Introduced by Irving Fisher, where it is stated that the nominal interest rate in a country will be equal to the real interest rate plus the inflation rate in that country. According to the Fisher Effect, the nominal interest rates in two countries can be different because their inflation rates are also different. 4. International Fisher Effect This opinion is based on the Fisher Effect as mentioned above, this opinion states that exchange rate movements in a country are caused by differences in nominal interest rates in the two countries. The implication is that people cannot enjoy profits simply by investing their funds in a country that has a high nominal interest rate because the currency of a country with a high nominal interest rate will depreciate (decrease in value) by the difference in the country's high nominal interest minus the country's nominal interest rate. low.