1. Financial Institutions and Markets Fall 2012 Dr. Andrew L. H. Parkes Day 13 “How do financial markets work?” 卜安吉

2. Oct. 16, 2012Financial Institutions & Markets, Day 132 Chapter 12: Foreign Exchange Markets The following is an example of how the Chinese government attempted to use the currency as a “policy” tool. That is, the government tried to slow down inflation by increasing the cost of Chinese renminbi (RMB). The time was winter of 2008, January. The Forex Market! Chaos?

3. Oct. 16, 2012Financial Institutions & Markets, Day 133 Foreign Exchange Markets continued China’s Major Economic Problem, 2007 Inflation of 6.5% over the past few months (annualized) in 2007 How did the Chinese government use exchange rates to slow inflation? For example: As pork prices were increasing, how did the Chinese government slow down pork price increases using the renminbi? Which is worth more? The Pork or the motorcycle?

4. Oct. 16, 2012Financial Institutions & Markets, Day 134 Foreign Exchange Markets continued For example: As pork prices are increasing, by allowing the RMB to appreciate, imported pork prices will fall and therefore, to remain competitive (and sell your pork to the Nan Xiang Xiao Long Bao restaurant) domestic pork producers must lower their prices as well! Which is worth more? The Pork or the motorcycle?

5. Oct. 16, 2012Financial Institutions & Markets, Day 135 Foreign Exchange Markets continued For example: As a restaurant owner, as long as the quality of the pork is the same, you will buy the least expensive pork. So An Appreciating currency will help to control inflation and lower domestic prices. Notice export prices will increase! Which is worth more? The Pork or the motorcycle?

6. Oct. 16, 2012Financial Institutions & Markets, Day 136 Foreign Exchange Markets continued This is a Stickup: Your pork or Your life! This is a Stickup: Your pork or Your life! Sunday, July 15th, 2007 Due to the rising prices of meat in southern China, robbers have started stealing pork because it has become so valuable. In the last year pork prices have soared more than 40%. According to the Shenzhen Jing newspaper, a peddler was robbed of his motorcycle and his load of 125kg of pork. He was on his way to a market in Shenzhen, which lies on the border of Hong Kong. The suspects rushed from a minibus and threatened him with a knife. Which is worth more? The Pork or the motorcycle?

7. Oct. 16, 2012Financial Institutions & Markets, Day 137 Foreign Exchange Markets continued This is a Stickup: Your pork or Your life! This is a Stickup: Your pork or Your life! Sunday, July 15th, 2007 “They took the pork because it was more expensive than the motorcycle,” a local police officer was quoted as saying. According to the police officer, the stolen motorcycle would fetch as little as 100 yuan, while the pork would be sold for more than 3000 yuan. According to the news report, the four would-be robbers were caught and will appear in court soon. Found at www.weirdasianews.com/2007/07/15/ Found at www.weirdasianews.com/2007/07/15/ - Jan. 15, 2008www.weirdasianews.com/2007/07/15/ Which is worth more? The Pork or the motorcycle?

8. Oct. 16, 2012Financial Institutions & Markets, Day 138 Foreign Exchange Markets continued 2007 Quiz: $1 = PP 38.5 | PP 41.00 #1. At which price will you “bill” a customer (from the U.S.)? #2. At which exchange rate will you sell pesos? #3. How much did the peso change? (in %) 1 year ago: PP 50 = $ 1 1 year ago: PP 50 = $ 1 Today: PP 40 = $ 1 Today: PP 40 = $ 1