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Chapter 6 (Exchange rates and the international monetary system) - Coggle…
Chapter 6 (Exchange rates and the international monetary system)
What affects the supply and demand for a currency?
Interest rates
If r are higher than that of another country's investments will be switched
Productivity & BOP
Improvement in productivity means a better competitive position so increasing Demand and increase of value of the currency
Inflation & money supply
High levels of inflation comes with high levels of money supply
Investor psychology
"Bandwagon effect" where investors move as a herd can occur when expectations by traders turn into self-fulfilling prophecies
Relative price differences
Arise from tariffs created by countries on the same goods (big mac index)
Types of exchange rate risks
Translation exposure
impact of currency exchange rate changes on the reported financial statements of a company
Economic exposure
firm’s future international earning power is affected by changes in exchange rates
Transaction exposure
income from individual transactions is affected by fluctuations in foreign exchange values
Strategies for risk avoidance
Risk transfer
Currency diversification
Risk avoidance
Risk adaption "hedging"
Exchange rate systems
Fixed
fix the values of currencies against each other
Pegged
value of a currency is fixed to a reference country and the exchange rate between that currency and other currencies is determined by the reference currency exchange rate
Floating
supply and demand, determines the relative values of currencies (USA, EU)
Types of financial crisis
Banking crisis
loss of confidence
Foreign debt crisis
a country can no longer service foreign debts
Currency crisis
speculation attack
Mitigating exchange rate risk
Strategic hedging
Cost & income are in the same currency
Risk diversification
reduce risk exposer by working in different countries or industries
Currency hedging
transactions are taken to protect trader & investor "bet"
Currency swap
agreement between to exchange currencies and exchange them back at an agreed upon time