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FOREIGN EXCHANGE MARKETS & EXCHANGE RATE - Coggle Diagram
FOREIGN EXCHANGE MARKETS & EXCHANGE RATE
What are function of foreign exchange rate?
Transfer purchasing power from 1 nation & currency to another
Provide credit for foreign transactions
Provide facilities for hedging & speculation
TYPES OF EXCHANGE RATE
Fixed exchange rate
the value of exchange rate is fixed to another country
Floating exchange rate
the exchange rate is floating it will be determined by the market forces that is supply & demand
Managed floating
the central bank choose intervene in the foreign exchange market to meet specific microeconomics objectives
Advantages of fixed exchange rate
avoid currency fluctuations
stability encourage investment
keep inflation low
Disadvantages fixed exchange rate
less flexibility
join the wrong rate
require higher interest rates
difficulty in keeping th value of currency
encourage speculative attacks
Advantages of flexible exchange rates
limit the central bank the need international for reserve
enchance the efficiency the economy by keeping optimum resources location
stabilizing speculation
Disadvantages of flexible exchange rates
temporary
the absence of Balance of Payments constraints might faster to pursuit of domestic economic policies to long run maximization
Factors affecting exchange rates
inflations
balance of payments
speculation
government debt
government intervention
change in competitive
foreign exchange rates (FOREX) is the priceof domestic currency in terms of another currency
how its works?
when currencies are exchange, its have a certain price of exchnage rate as in any market the price of a currency is determined by law of supply and demand
APPECIATION
a standard currency quote lists two currencies as a rate
the quoted currency & is represented by the rate as the amount of that currency needed to equal one unit of the base currency
reason to currency appreciation
government policies
interest rate
bisnes cycle
Efffect
import cheaper, high quality of import and inflation lower
export more expensive, lower quantity of exports and lower aggregate demand
DEPRECIATION
it is a fourth value of currencies as a rate
reason to currency
government policies
interest rate
bisnes cycle
effect
import higher, lower quantity of import and inflation higher
exports more cheap, higher quality of export and agregate demands higher
ARBITRAGE
when we buy low price good on market and sell that the some good at a higher price in another market
effect
to bring the price in those 2 market closers
it make more difficult for firms to price discriminate
condition price in balance
the same goods is traded at different prices in difference market
goods with similar cash flows are traded at different prices
an asset with a known future price currently traded at a price different from the expected value on the future cash flows.
Risk
a speculative and not a risk - free investment
SPOT AND FORWARD RATE
spot rate is exchange rate that call for payment and receipt of the foreign exchange within 2 business day from the transaction day
forward rate is the exchange rate that call for the delivery of the foreign exchange one, two, three, six, twelve or twenty-four month after the date the contract is sign
CURRENCY SWAP , HEDGHING AND SPECULATION
currency swap is when 2 party want to swap their currency at certain amount with current exchange rate & pay back at the same rate at the certain period of time
hedghing is the avoidance of foreign exchange rate
speculation is the opposite of hedghing . it is the acceptance of foreign exchange risk in the hope making profit