Business Finance Homework Help

1-Hi Class,

The foreign exchange market is the marketplace in which people, companies, and banks buy and sell foreign currencies or foreign exchange. For example, we have the New York Stock Markets where is always in contact with a different international foreign exchange market let’s say Tokyo. The main objective is to trade or the transfer of funds or purchasing power from one nation and currency to another. These transactions are made via an electronic transfer and increasingly through the Internet. Then, a domestic bank instructs its correspondent bank in a foreign monetary center to pay a specified amount of the local currency to a person, firm, or account (Salvatore, 2013).

It is tricky dilemma when it comes to economic power or PPC that a country can do with a fixed or flexible exchange rate. Francesco Caramazza and Jahangir Aziz wrote an article published on the International Monetary Fund arguing that for developed country is a gain to have flexible rates because they can adjust and exercise well in the trading zones; however, for developing countries were they have high inflation and very bad monetary policies in place can be catastrophic. For example, a currency market destruction happened in Southeast Asia due to inappropriate polices and adaption issues to changing circumstances in the 90’s.

For example, Salvatore drafted a graph where it shows how a flexible exchange rate can benefits people and companies while trading the US dollars. Since the US dollar is a very strong and stable currency used in the trade industry.

Arbitrage is a possible solution to balance any two currencies to eliminate inconsistent cross rates. As arbitrage takes place, however, the exchange rate between the two currencies tends to be equalized in the two monetary centers. This exercise can only occur between two strong currencies like the US dollar and Euros. If a country’s currency is not strong enough, they will lose big.

Reference

Economic issues No. 13 — fixed Or Flexible? Getting the exchange rate right in the 1990s. International Monetary Fund. (1998, April). https://www.imf.org/external/pubs/ft/issues13/.

Salvatore, D. (2013). In International economics (pp. 423–428). essay, John Wiley & Sons

2-

More than $5 trillion is exchanged the money markets consistently, a huge aggregate by any measure (Giannellis & Koukouritakis, 2018). The entirety of this volume exchanges around a swapping scale, the rate at which one cash can be traded for another. As such, it is the estimation of another nation’s cash contrasted with that of your own. In the event that you are making a trip to another nation, you have to purchase the neighborhood cash. Much the same as the cost of any advantage, the conversion scale is the cost at which you can purchase that money. Hypothetically, indistinguishable resources should sell at similar cost in various nations, on the grounds that the exchange rate must keep up the inalienable estimation of one money against the other.

A fixed, or pegged, rate is a rate the central bank sets and keeps up as the official swapping scale. A set cost will be resolved against a significant world money. So as to keep up the neighborhood conversion standard, the national bank purchases and sells its own cash on the unfamiliar trade market as a byproduct of the money to which it is pegged. If, for instance, it is resolved that the estimation of a solitary unit of nearby money is equivalent to US$3, the national bank should guarantee that it can gracefully the market with those dollars (Gün, 2015). So as to keep up the rate, the national bank must keep a significant level of unfamiliar stores. This is a saved measure of unfamiliar cash held by the national bank that it can use to deliver additional assets into the market. This guarantees a fitting cash gracefully, suitable variances in the market and at last, the conversion scale.

In contrast to the fixed rate, a floating exchange rate is controlled by the private market through gracefully and request. A floating rate is frequently named “self-amending,” as any distinctions in flexibly and request will naturally be adjusted in the market. See this disentangled model: if interest for a cash is low, its worth will diminish, consequently making imported merchandise more costly and animating interest for neighborhood products and enterprises. This, thusly, will produce more positions, causing an auto-revision in the market(v, 2015). A coasting conversion standard is continually evolving. Truly, no cash is completely fixed or coasting. In a fixed system, market weights can likewise impact changes in the swapping scale.

Reference:

Giannellis, N., & Koukouritakis, M. (2018). Currency misalignments in the BRIICS countries: Fixed vs. floating exchange rates. Open Economies Review, 29(5), 1123-1151. doi:http://dx.doi.org/10.1007/s11079-018-9477-0

Gün, M. (2015). FIXED VS. FLOATING: UNDER WHICH EXCHANGE RATE REGIMES PPP HOLDS-AN EMPIRICAL STUDY ON TURKISH ECONOMY. Isletme Iktisadi Enstitüsü Yönetim Dergisi, (78), 100-118. Retrieved from https://search.proquest.com/docview/1812280291?accountid=35796

3- thanks for your contribution to this week’s discussion; your assessments are correct. According to Gerber (2018), fixed exchange rates are similar to gold standards, but instead of pegging the home currency to gold, it is pegged to another currency or a basket of currencies. This can create a sudden increase in demand for foreign exchange in a country with a fixed exchange rate system. Gerber (2018) further acknowledges that monetary authority must be willing and able to convert the national currency into the currency it pegs, too, at the official exchange rate. However, this process limits the ability to use monetary policy since the money supply must not grow beyond the point where it can be converted.

Gerber (2018) believes that a rightward shift in the demand curve can lead to a depreciation of the home currency. However, the monetary authority should not let that happen, so they must counter the demand shift with a supply shift. The supply shift must be large enough to keep the exchange rate constant. The monetary authority must have enough foreign exchange on hand to be able to supply the increasing demand.

Fixed exchange rates, according to Gerber (2018), come in various forms. Countries can adopt a foreign currency as their own. Some can peg to foreign currency and keeps it fixed. Some peg to a basket of foreign currencies. Some peg to foreign currency and adjusts it periodically. This is called a crawling peg. Some can also peg to another currency but let it float up or down by some percentage before intervening. Fixed interest rates can provide greater certainty about the future exchange rate; A more certain business planning environment. What are some of the pitfalls of adjusting your currencies periodically?

Reference

Gerber, J. (2018). International Economics.7 the edition. Pearson Education, Inc.