currency exchange between nations
DESCRIPTION
Currency Exchange between nations. 3.2 A: Floating Exchange Rates. The Foreign Exchange Market. An exchange rate is the value of one currency expressed in terms of another currency. Currency is exchanged in the international Foreign Exchange Market. (FOREX). Extra interesting info. - PowerPoint PPT PresentationTRANSCRIPT
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Currency Exchange between nations
3.2 A: Floating Exchange Rates
The Foreign Exchange Market
An exchange rate is the value of one currency expressed in terms of another currency.
Currency is exchanged in the international Foreign Exchange Market. (FOREX)
Extra interesting infoThe foreign exchange market (and
commonly abbreviated as forex or simply ‘FX’) is the largest, most liquid, most actively traded financial market in the world.
With an estimated four and half trillion dollars of value being traded everyday, the foreign exchange market is a decentralized network of financial institutions where all the world’s currencies are traded.
Currency transactions can take place from various locations around the world. One location doesn’t have authority over another.
Price of NZD in
USD
Amount of NZD
S
D
In a free floating system: demand and supply forces determine the exchange rate
0.71
The demand for a currency is derived from: Any money flow into one country from another
country.
Current account inflows Exports of goods and services Investment income earned
Capital account inflows Foreign Investment (of a nation’s shares or
assets) Buying a nation’s currency chasing either:
Higher interest rates Speculation of higher exchange rates
The supply of a currency is derived from any flow out of a country into another in order to
buy…
Current account outflows Imports of goods and services Investment income earned from abroad
Capital account outflows Foreign Investment (buying foreign shares or
assets) Buying foreign currency (hot money), chasing
either: Higher interest rates Speculation of higher exchange rates
A floating exchange rate system allows its currency to be valued according to the demand and supply in the forex (without government intervention).
For example: when NZ imports cars from Japan…
JapanNew ZealandFOREX
IMPORT PAYMENTS
EXPORT RECEIPTS
TWO WAYS FOR a currency TO APPRECIATE
NZD/USD
S1
D
Q of NZD
D1
S
fig
1.75
2.00
2.25
2.50
2.75
3.00
0
TWO WAYS FOR a currency TO DEPRECIATEPr
ice
of E
UR
O in
NZD
Quantity of EURO
S1
D1
S2
D2
Depreciation
Time-dependent determinantsfor currencies
in the short-run, “hot money” – chasing high interest rates – far exceed trade flows
in the medium term, a consistent current account surplus/deficit will lead to a currency movement.
Think: which will lead to an appreciation?in the long run, inflation rates will lead to a
currency movement. Think: which will lead to an appreciation?
Pairs competition!
Gives clues (e.g. Examples) of any international money flow
The other team must correctly identify the impact on supply or demand, and the impact on the X∆R
(You may refer to either a specific item, or account and or state the direction of money flow)
Grade A task: report on current pressures affecting the exchange rate of any
country
Look for: imbalances in the B/P accounts? upcoming pressures? What’s your 12-month forecast? check out http://www.xe.com
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3.2 B Fixed Exchange RatesHow do they do it?
What is a fixed exchange rate system?
A fixed exchange rate is a system where the value of the currency is fixed (pegged) to the value of another currency.
to “revalue” means to adjust the currency upwards
to “devalue” means to adjust it downwards
A managed” system is where the government occasionally intervenes to keep the currency from fluctuating too much.
Essentially, the pressures on Supply or Demand of the currency must be counter-acted.
1. The central bank can sell (supply) more of its currency on the Forex (and thus increase foreign reserves). This is the response when the currency is… Or buy its currency (using its foreign reserves)
(and borrow from the IMF if it’s a crisis.) This is the response when the currency is…
2. Adjust interest rates. How will this work?
How can a currency be fixed?
how could a government counter these forces?
NZD/USD
S1
D
Q of NZD
D1
S
Current exchange rate regimes
dark green - free float regime, light green - Managed float regime, blue - different types of fixed currency (peg)http://en.wikipedia.org/wiki/File:Currency_Exchange_regimes.png