January 19, 2006 Name_____________________________
Lecture 1: ECON 3633-900
Please refer to the handout, which contains exchange rate quotes as of January 17, 2006.
1. Consider the direct dollar quote for euros on Tuesday January 17, 2006.
a. Find the indirect quote mathematically, without using the tables.
The direct quotation for euros is $1.2105. Then, the indirect quotation (the
euro price of the dollar) is given by:
S(€/$) = 1/ $1.2105 =€ 0.8261.
b. Relative to Tuesday, has the Euro appreciated or depreciated? Explain
The direct quotation from the euro perspective is the indirect quotation from
the US perspective. Recall that the direct quotation from the perspective of
the euro (relative to the dollar) is the euro price of the dollar. In this case, we
see the direct quotation for the euro has risen (from €0.8248 to €0.8261). In
this case, the euro has depreciated.
c. From the US perspective, write down the direct quote for the Australian
dollar. Again, from the US perspective, write down the indirect quote for
the Japanese yen. Use these quotes to find the Australian dollar price of
the Japanese yen.
The direct quotation for the Australian dollar is: $0.7523. ($/A$).
The indirect quotation for Japanese yen is: ¥115.43 (¥/$).
We wish to calculate S(A$/¥). Do we multiply or divide the quotes?
Suppose we multiply the quotes. We have something who’s unit of
measure is ($/A$) and we multiply by (¥/$). This will give us the yen price
of the A$. We want the Australian dollar price of the yen. However, as
above, we can simply take the reciprocal to get the Australian dollar price
of the Japanese yen. The result:
($/A$) 0.7523 * (¥/$) 115.43 = ¥86.837989.
Now, the Australian dollar price of the yen is simply 1 divided by this
number:
S(A$/¥) = 1/(S(¥/A$)) = 1/86.837989 = A$ 0.01152.
