1. Explain 4 functions of currency exchange markets. Provide a thorough example (real or hypothetical) of each type of function in action in business.
a. Currency Conversion: is a way to execute a transaction by converting one currency into another. This takes place when you/your company decides to invest in international affairs. When engaging in a foreign investment you must convert your US dollars into the foreign currency when making a sales and the opposite would happen if the country was buying a product from you.
i. For example, Sanofi-Aventis, a French pharmaceutical company, wants to sell a new medication for diabetes to the United States. The American customer wants to pay for the medication in dollars, the American currency,
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The payment date is shortly approaching and Toyota Motors is now concerned about the value of the payment in Japanese yen a month from the payment date, they want to ensure against the possibility that the pesos’ value will fall over that period and receive less money. On December 16th, Toyota Motors establishes a contract with a local bank to exchange the payment in one month at an agreed upon exchange rate specified on December 16th. Now Toyota Motors will know how many yen the payment will be worth on January 16th.
c. Currency Arbitrage: is the instantaneous purchase and sale of a currency in different markets for profit. This type of currency exchange market is frequently used by experienced traders in foreign exchange markets, along with large investors. Using this type of exchange market maximizes oyur profits and allows you to evaluate three currencies at a time and brings the market into an equilibrium.
i. For example, as you are investing in the New York Stock exchange you notice that the Malaysian ringgit is lower in Greece than it is in New York. As a trader you can buy riggits in Greece, sell them in New York, and earn a profit on the spread. Now the process of this trade is not worth making if the spread between the value of the riggit, the value in Greece and the value in New York is not greater than the cost of conducting the transaction. ii. Interest Arbitrage: is a profit motivated purchase and sale of interest-paying securities
11. Describe at least three exchange rate factors that are likely to attract foreign investors to a country 's currency. Explain why these factors are attractive for foreign investors. (3-6 sentences. 3.0 points)
Exchange rates play a pivotal role in the relationships between individual economies and the global economy. Almost all financial flows are processed through the exchange rate, as a result the movements and fluctuations of the exchange have a significant impact on international competitiveness, trade flows, investment decisions and many other factors within the economy. Due to the increasing globalisation of the world economy, trade and financial flows are becoming more accessible
An exchange rate is the price for which one currency is worth converted into another rate. The exchange rate is determined by the supply and demand conditions of relevant currencies in the market transaction of currency exchanges occur in the foreign exchange markets. For example, currently, the £1 is worth $1.67 which means that at this stage, the pound is stronger than the dollar. Businesses should ensure that they frequently check the exchange rates to see if any changes to their prices need to be made or if the exchange rate benefits them. If Iron Bru were to export a large amount of products to a country such as Germany or Poland, there will
U.S. Corporations do an ever increasing amount of business overseas. This business, however, is usually done in local currency. When this money is to be reported to the IRS it must be converted into US Dollars which can come with a gain or loss on the conversion.
As consumers, we all live in a society where our needs and wants are the drive for our consumption of certain goods and services. At this point elements of supply and demand are factored into the equation: in order to supply some goods and services that are being demanded countries rely on importing and exporting. To obtain these goods and services some form of compensation/ incentive is needed. Conducting trade by means of barter is not very practical in most circumstances and today’s society. So we use money. Different countries use different forms of money: the Dollar in the United States of America, the Euro in Europe, the Pound in The United Kingdom and in China the Renminbi .What happens when countries who want to trade with each other use different forms of money, when their units of monetary exchange are not the same? Common sense would tell the buyer to exchange their currency to match that of the sellers, and so they do so.
Such a process can be very time consuming and imprecise, without, of course, having a market currency price to begin with. The exchange-rate system is an important topic in international economic policy. Policymakers and journalists often seem to treat the choice of exchange-rate system as one of the most important economic policy choices that a national government makes, on a par with free international trade. Under most circumstances and for most countries, a system of freely floating exchange rates is likely to be a better choice than attempting to peg the exchange rate.
8. How can a central bank peg the value of its currency relative to another currency?
How can a central bank use direct intervention to change the value of a currency? Explain why a central bank may desire to smooth exchange rate movements of its currency..
The third market is the foreign exchange market or balance of payments. This is where the availability of foreign currency is balanced against the demand for it (Pugel, 2012, p. 564). The term foreign exchange market is used when referring to the exchange rate and the term balance of payment is used when referring to the country’s settlements balance.
Understanding the relationships among world currencies is vital to successful operations in a global economy. There is money to be made by managers who can effectively manage exchange rates in the course of their business dealings. There is money to be lost by managers who fail to recognize the significance of these rate relationships.
There are international markets where the internationally accepted currency is a trade. Such currency is deposited with
Currency derivative can be defined as a contract or financial agreement to exchange two currencies at a given rate or a contract whose value is derived from the rate of exchange of two currencies on spot (Shoup, 1998). Currency derivatives are developed and adopted to implement a strategy known as hedging, in which an organisation acquires a contract in order to offset an expected drop or rise in value of a position or future cash flow (Belk & Edelshain, 1997). This essay will outline the incentives and rationales behind an organisation that uses currency derivatives.
OW does one determine whether a currency is fundamentally undervalued or overvalued? this question lies at the core of international economics, many trade disputes, and the new IMF surveillance effort. George Soros had the answer once—in 1992—when he successfully bet $1 billion against the pound sterling, in what turned out to be the beginning of a new era in large-scale currency speculation. Under assault by Soros and other speculators, who believed that the pound was overvalued, the British currency crashed, in turn forcing the United Kingdom’s dramatic exit from the european exchange Rate Mechanism (eRM), the precursor to the common european currency, the euro, to which it never
currency as the quoted price currency, it is known as direct (price) quotation; most countries use