The Mexican Peso: A Currency In Turmoil

Jim would need to estimate the amount of footballs that would be sold to the distributor in Mexico each month. The revenue to be received would be equal to the number of footballs sold times the price (in pesos) per football. This revenue would be converted into dollars, at the prevailing exchange rate. The value of the peso can change abruptly over time. The peso’s value must be forecasted for each month, so that the dollar cash inflows can be estimated.

The Colombian peso has dropped considerably against the US dollar. The drop has shown a 36% difference from last year’s. This freight train has been moving on due to the failing price of petroleum.

On December, 1994 the government of Mexico announced the devaluation of its currency which was a surprise to the financial markets. Mexico had followed an “exchange rate policy of maintaining the peso within a well defined band against the US dollar” (Truman,1996.199). As the current account deficit rose this policy had come under pressure. The devaluation on December 20 fail to stabilize peso and two days later was forced to let it float, causing its external value to plummet.

In finance a carry trade is a strategy that consists of borrowing at a low interest rate currency to fund investment in higher yielding currencies. (Moffett) The country in which the investors borrow from is called the funding country and the country where the investment occurs is called the target country. (4) Carry trade is also termed currency carry trade; this strategy is speculative in that the currency risk is present and not managed or hedged. (Moffett) Although there are several complicated carry trades in finance, the most popular are carry trades in the foreign exchange market, which I will discuss in this paper and its role in the financial crisis of 2008.

To be sure, financial markers had indicated a higher Canadian dollar for various years before its possible ascent. At the point when the Canadian dollar came to an temporary level in 2006, exchanging somewhere around 86 and 90 pennies US for a great part of the year, this cost was thought to be a sensibly specific, if maybe somewhat exaggerated, evaluation of the value of the Canadian dollar. Late in 2007, the dollar is exchanging at or above equality with the US dollar. In fact, the dollar's affecting lately has highlighted the way that it is about difficult to make exact forecasts about brief exchange scale developments. Trade rates are influenced by an excess of variables – worldwide ware costs, financial approach and conditions in the United States, the capacity of the Canadian economy to adjust to the higher dollar, to give some examples – for any such

Purchasing power Parity (PPP), is a theory stating that the unit of one currency should have the same purchasing power as the foreign currency. Following the theory, where the normal exchange rate between two currencies should be the same as the ratio of aggregate price level between them. It can be also called “inflation theory of exchange rates” as it stands for the theory of a change of price level where as the overriding determinant of exchange rate movements. It is the same status as Quantity theory of money(QT). To make things clear, the dogma of PPP or its alternative Law of one Price (LOOP), states that when goods in the basket expressed in a single currency meaning that they cost the same in all countries. This can be achieved only if the rate or nominal exchange rate is equal to the differences between growth rate. The dental of LOP context is to find the most disaggregate product and price can be readily material-provides as strong presumption that it is impossible to assemble available date into aggregate price index which can be expected to obey the LOP.

This paper argues that the Mexican peso crisis of December 20 should have been expected and foreseeable. In the year preceding the crisis, there were several indicators suggesting that the Mexican economy and peso were already under extreme pressure. The economy bubble was ballooning to burst so much so that it was simply a crisis waiting to happen.

Activity of trading on Brazilian exchanges depends on how investors feel about economic stability of the country and new opportunities and potential returns in the financial market. Currently, there are risks that Standard &Poor can

For the purpose of this paper, only the highs and lows during the years of 2005-2010 will be evaluated and compared. To start, in 2005, the exchange rate of the U.S. dollar (USD) had fluctuated from a low of (BRL) R$2.16 to a high of (BRL) R$2.77 while in 2006, the exchange rate of the U.S. dollar (USD) had fluctuated from a low of (BRL) R$2.06 to a high of (BRL) R$2.41. Throughout 2007, the exchange rate of the U.S. dollar (USD) had fluctuated from a low of (BRL) R$1.73 to a high of (BRL) R$2.15. In 2008, the exchange rate of the U.S. dollar (USD) had fluctuated from a low of (BRL) R$1.56 to a high of (BRL) R$2.62. During this time, the heightened exchange rate of the Brazilian real was largely influenced by the devaluation of the U.S. dollar in relation to the financial crisis affecting the U.S. economy and global markets (Wikipedia). Moreover, in 2009, the exchange rate of the U.S. dollar (USD) had fluctuated from a low of (BRL) R$1.70 to a high of (BRL) R$2.45, and by the end of 2009, the U.S. dollar was near an eight year low against the real, having lost a massive 33+% of its value during 2009 alone (Brazilian Consulting). In 2010, the Brazilian Central Bank made the decision to raise interest rates in the country, which resulted in the strengthening of the real and the weakening of the dollar. By the end of 2010, the exchange rate of the U.S. dollar (USD) had fluctuated from a low of (BRL)

It is one thing to liberate an economy or a market; it is another to lift all regulations on such market. Economic liberalization should be done in an appropriate, intelligent manner. The lack of proper regulation can lead to a snowballing effect where a seemingly trivial matter can lead up to a terrible outcome. This was the case of Mexico in 1994 where birth was given to the “Tequila Effect”. What were the conditions in the country that gave way to this crisis? Could the crisis have been avoided? Perhaps under a more strictly regulated economy Mexico’s financial crisis could have been prevented, and if not, it could have been toned down in severity. The government’s decision to

Between1992-93, NAFTA agreement was in the center stage boosting investor confidence. During which peso was fairly stable, remaining in the lower half of the band. In the first 18 months of the program, inflation fell to less than 20 percent but then the pace of disinflation became very slow. It should also be mentioned that between1992-94 capital inflow to Mexico was 7 percent of GDP. There were also discussions regarding the appreciation of peso together with the growing current account deficit which was being financed by these inflows. To avoid the problem of rolling over a sizable amount of domestic debt at high interest rates and further rise in interest rates, Mexico had a crucial

dollar. In dollarization, the country abolishes its own currency and uses a foreign currency, such as the U.S. dollar, for all domestic transactions. 6. Emerging market exchange rate regimes. High capital mobility is forcing emerging market nations to choose between free-floating regimes and currency board or dollarization regimes. What are the main outcomes of each of these regimes from the perspective of emerging market nations? There is no doubt that for many emerging markets a currency board, dollarization, and freely-floating exchange rate regimes are all extremes. In fact, many experts feel that the global financial marketplace will drive more and more emerging market nations towards one of these extremes. As illustrated by Exhibit 2.5, there is a distinct lack of “middle ground” left between rigidly fixed and freely floating. In anecdotal support of this argument, a poll of the general population in Mexico in 1999 indicated that 9 out of 10 people would prefer dollarization over a floating-rate peso. Clearly, there are many in the emerging markets of the world who have little faith in their leadership and institutions to implement an effective exchange rate policy.

There has been a long standing controversy among the economist about the validity of PPP (Purchasing Power Parity) in the long run. The parity reveals that prices in two different economies should be identical to each other when they expressed in terms of the same currency. It is a central building block in the monetary models of exchange rate determination. One of the most common practices, to test the validity of PPP is through unit root test of real exchange rate. In this paper unit root test has been done based on the data on Bangladesh and its major trading partner India, to see whether exchange rate has unit root or not. It has been found out that the PPP holds i.e. real exchange is not trend stationary in the

The project attempts to study the major question, namely whether or not the absolute purchasing power parity (APPP) and

This paper tackles the effects of the foreign exchange rate as a whole and how it affects the country and at the same time how it gets affected. This paper enumerates the advantages and disadvantages of having a strong Peso. The paper also discusses what factors affect the strengthening and weakening of the Philippine Peso. This paper also includes an in depth analysis of how the foreign exchange could affect and gets affected by the economy, the society and politics.