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CHAPTER 9: FOREIGN EXCHANGE MARKET AND AND EXCHANGE RATE - Coggle Diagram
CHAPTER 9: FOREIGN EXCHANGE MARKET AND AND EXCHANGE RATE
FOREIGN EXCHANGE MARKET
Foreign exchange market is the location where international currencies are bought and sold by economic participants at various exchange rates
:check: FLOATING AND FIXED EXCHANGE RATES
Floating exchange rate is one that fluctuates with the market. if demand goes up or down or supply goes up and down the exchange rates going to change in the market
Fixed exchange rate is when the government manipulates the value of a country's currency
:check: PRACTICE OF FOREIGN EXCHANGE MARKET
Shifters
tastes and preferences
price level
income
:check: DEFINITION
each nation uses a different currency from the other (every time a trade transactions is made between any of these nations, the nation who is exporting or selling their goods must be paid in their own domestic currency
DEPRECIATION
fall in the value of currency in the floating exchange rate system
economic fundamental
political stability
interest rate differential
FUNCTION OF FOREIGN EXCHANGE MARKET
provide credit for foreign transactions
transfer purchasing power from one nation to another nation
APPRECIATION
increase in the value of currency comparing to another currency
reason contribute to currency appreciation --- government policy, interest rate, trade balance and business cycle
effects --- export cost rise, cheaper imports
HEDGING
avoidance of foreign exchange rate
SPECULATION
the acceptance of foreign exchange risk in the hope to make profit
ARBITRAGE
when we buy goods with low price in one market and sell it at higher price in another market
CURRENCY SWAP
when two party want to swap their currency at certain amount with current exchange rate and pay back at the same rate in the certain period of time
FORWARD RATE
exchange rate that call for the delivery after foreign exchange 1,3,6,12 or 24 months after the date when the contract is sign