Summary of The Determination of Exchange Rates
Summary of The Determination of Exchange Rates
■ The International Monetary Fund (IMF) was organized in 1944 to promote exchange stability, maintain orderly exchange arrangements, avoid competitive currency devaluation, establish a multilateral system of payments, eliminate exchange restrictions, and create standby reserves.
The Special Drawing Right (SDR) was instituted by the IMF to increase world liquidity.
The currencies of countries that are members of the IMF are divided into three categories: those that are pegged (fixed in value) to a single currency or to a composite of currencies, those that have displayed limited flexibility compared with either a single currency or a group of currencies, and those that are more flexible.
Many countries that strictly control and regulate the convertibility of their currencies have a parallel, or black, market that maintains an exchange rate more indicative of supply and demand than is the official rate.
The Bank for International Settlements (BIS) in Switzerland acts as a central banker's bank. It facilitates discussion and transactions among the central banks of the world.
The demand for a country's currency is a function of the demand for that country's goods and services and financial assets denominated in that currency.
A central bank intervenes in currency markets by creating a supply for its currency when it wants to push the value of the currency down or creating a demand for its currency when it wants to strengthen its value.
A devaluation of a currency occurs when formal governmental action causes the foreign-currency equivalent of that currency to fall (or that currency's equivalent of the foreign currency to rise). A depreciation occurs with a change in the same direction that is permitted by the government but not formally acted on as such.
The major factors that determine the value of a currency are purchasing-power parity (relative rates of inflation), real interest rates (nominal interest rates reduced by the amount of inflation), confidence in the government's ability to manage the political and economic situation of the country, and certain technical factors that are a result of trading.
The major determinant of the forward exchange rate is the interest-rate differential between currencies.
The major factors that managers should monitor when trying to predict the direction, magnitude, and timing of an exchange-rate change are the balance-of-payments statistics, the country's reserve position, relative rates of inflation, interest-rate differentials, trends in spot rates, and the forward exchange rate. Also, they must look at the political situation.
A country's balance-of-payments statement summarizes all international transactions by government, business, and private residents during a specified period of time (usually one year).
In the system of double-entry accounting, each transaction, as represented by a debit or credit, is offset by an entry that represents the financing or settling of the transaction.
The major balances in the balance of payments that require close monitoring are the merchandise trade balance, the balance on goods and services, the current-account balance, and the basic balance (the current-account balance plus long-term capital flows).
Exchange rates can affect businesses in three major ways: market decisions, production decisions, and financial decisions.
■ The International Monetary Fund (IMF) was organized in 1944 to promote exchange stability, maintain orderly exchange arrangements, avoid competitive currency devaluation, establish a multilateral system of payments, eliminate exchange restrictions, and create standby reserves.
The Special Drawing Right (SDR) was instituted by the IMF to increase world liquidity.
The currencies of countries that are members of the IMF are divided into three categories: those that are pegged (fixed in value) to a single currency or to a composite of currencies, those that have displayed limited flexibility compared with either a single currency or a group of currencies, and those that are more flexible.
Many countries that strictly control and regulate the convertibility of their currencies have a parallel, or black, market that maintains an exchange rate more indicative of supply and demand than is the official rate.
The Bank for International Settlements (BIS) in Switzerland acts as a central banker's bank. It facilitates discussion and transactions among the central banks of the world.
The demand for a country's currency is a function of the demand for that country's goods and services and financial assets denominated in that currency.
A central bank intervenes in currency markets by creating a supply for its currency when it wants to push the value of the currency down or creating a demand for its currency when it wants to strengthen its value.
A devaluation of a currency occurs when formal governmental action causes the foreign-currency equivalent of that currency to fall (or that currency's equivalent of the foreign currency to rise). A depreciation occurs with a change in the same direction that is permitted by the government but not formally acted on as such.
The major factors that determine the value of a currency are purchasing-power parity (relative rates of inflation), real interest rates (nominal interest rates reduced by the amount of inflation), confidence in the government's ability to manage the political and economic situation of the country, and certain technical factors that are a result of trading.
The major determinant of the forward exchange rate is the interest-rate differential between currencies.
The major factors that managers should monitor when trying to predict the direction, magnitude, and timing of an exchange-rate change are the balance-of-payments statistics, the country's reserve position, relative rates of inflation, interest-rate differentials, trends in spot rates, and the forward exchange rate. Also, they must look at the political situation.
A country's balance-of-payments statement summarizes all international transactions by government, business, and private residents during a specified period of time (usually one year).
In the system of double-entry accounting, each transaction, as represented by a debit or credit, is offset by an entry that represents the financing or settling of the transaction.
The major balances in the balance of payments that require close monitoring are the merchandise trade balance, the balance on goods and services, the current-account balance, and the basic balance (the current-account balance plus long-term capital flows).
Exchange rates can affect businesses in three major ways: market decisions, production decisions, and financial decisions.
Comments
Post a Comment