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Foreign Exchange Markets & Exchanges Rates - Coggle Diagram
Foreign Exchange Markets & Exchanges Rates
Foreign Exchange Market
:pencil2: Market where individuals, firms and banks buy and sell foreign currencies or foreign exchange.
transfer purchasing power from one nation and currency to another.
provide credit for foreign transactions.
provide facilities for hedging & speculation
Types of exchange rate systems
Fixed
Floating
Managed floating
Fixed Exchange
:!:The value of exchange rate is fixed to another country equilibrium above fixed rate
used primarily by small, developing nations
currencies are anchored to a key currency
anchoring to a single currency
anchoring to the special drawing right
anchoring to a basket of currencies
currency basket
Par value in terms of gold or other key currencies
Official exchange rate can be determined by comparing the par values of two currencies
exchange-stabilization fund to defend the official rate through purchases and sales of foreign currencies
Floating Exchange
:warning: The exchange rate is floating it will be determined by market forces of demand for and supply of the currency.
currency prices established daily in the foreign-exchange market without restrictions imposed by government policy
demand for and supply of the home currency determine the equilibrium exchange rate
changes in the exchange rate correct a payment imbalance through shifts in imports and exports of goods, services and short-term capital movements
Foreign Exchange Risks, Hedging &
Speculation
:explode:
Foreign exchange risk is involved because spot rates vary over time
may become more expensive if the domestic currency falls in value
Hedging - is the avoidance of foreign exchange
risk.
Speculation - acceptance of foreign exchange risk in the
hope of making a profit.
Stabilizing Speculation
Destabilizing Speculation
Interest Arbitrage & the Efficiency of
Forex Markets
interest arbitrage
uncovered interest arbitrage
Covered interest arbitrage
Managed Floating
:star: Informal guidelines established by IMF for coordination of national exchange-rate policies.
Market intervention to stabilize exchange rates in the short term.
Allows market forces to determine exchange rates in the long term.
A nation can alter the degree to which it intervenes in the foreign exchange market
Foreign Exchange Rates
Equilibrium :lock: The price of domestic currency in terms of another currency.
Depreciation
an increase in the domestic price of the foreign currency
Appreciation
- a decline in the domestic price of the foreign currency
Cross exchange rate
Effective Exchange Rate
Arbitrage
Spots and Forward
Currency Swap
Foreign Exchange Futures
Foreign Exchange Options