Exchange rates

MK, Unit 26

How would you define exchange rates?

The price of one country's currency expressed in another country's currency.

Research the following question in a group

What are the main types of exchange rate regimes?

Read MK p. 128 and answer these questions:

1. What are the main types of exchange rate regimes?2. How did gold convertibility work? Why did it end?3. What is a fixed exchange rate system?4. What does a floating exchange rate system mean?5. What are its advantages and disadvantages?6. Do freely floating exchange rates function as, e.g.,

Friedman predicted?7. How does speculation on the currency market affect

industry?8. Why was the euro established?9. How do governments and central banks try to

manage floating exchange rates?

Par. 5

A managed floating exchange rate is an exchange rate that is allowed to fluctuate due to supply and demand factors but can sometimes be altered by the government or the central bank.

Explain these sentences. Pay special attendtion to the underlines phrases.

“In theory exchange rates should give purchasing power parity.”

Financial institutions, companies and rich individuals all buy currencies, looking for either higher interest rates or short-term capital gains if the currency appreciates.”

“Although it is possible to some extent to hedge against currency fluctuations by way of futures contracts, forward planning is difficult when [prices] can rise rapidly.”

Put these terms into 3 groups

Supply and demand Gold convertibility Foreign currency

reserves speculation intervention by the

gov./ central bank Devalue depreciate

deregulated financial systems

Created to reflect purchasing power parity

pegging against the dollar/euro

appreciate Revalue

Fixed exchange rates

Freely floating exchange rates

Managed floating e. r.

Fixed exchange

rates

Freely floating exchange rates

Managed floating e. r.

•Gold convertibility•pegging against the dollar/euro•Revalue•Devalue

•Deregulated financial systems•Supply and demand•Created to reflect purchasing power parity•Speculation•Depreciate•Appreciate

•Intervention by the gov./central bank + supply/demand •Foreign currency reserves•Speculation•Depreciate•Appreciate

Explain the difference between the following pairs of terms:

Fixed exchange rates freely floating

exchange rates Devaluation Appreciation

floating exchange rates managed floating

exchange rates Revaluation Depreciation

Fill in the gaps with the help of the reading

You can exchange a currency ___ an other ___ a certain rate.

Post-WWII major currencies were pegged ___ the dollar.

Floating exchange rates are determined ___ supply and demand.

Friedman argues that currencies would settle ___ stable rates.

Fill in the gaps with the help of the reading

You can exchange a currency for an other at a certain rate.

Post-WWII major currencies were pegged against the dollar.

Floating exchange rates are determined by supply and demand.

Friedman argues that currencies would settle at stable rates.

What do you know about the foreign exchange market?

What are the other names of the foreign exchange market? Forex market Currency trading market fx

Where is it situated? No central location, a network of international

brokers and dealers.

Listen and watch

Common Craft about The Foreign Exchange Market - Realized by Fabienne Deville (Assistant Professor in Finance) with the help of the NTE team, HEC-ULg - Voice by David Homburg

https://www.youtube.com/watch?v=-qvrRRTBYAk

Answer the questions based on the video:

What determines the value of the £ against the €?

Who are the actors on the foreign exchange market?

What factors affect a currency’s exchange rate?

Which type of exchange rate system was video about?

Answers:

Who are the actors on the foreign exchange market? Companies (import – export of goods and

services) States Investors Speculators Tourists (travel) Financial institutions

Answers: What factors affect a currency’s exchange

rate? Supply and demand Interest rates Political situation of the country (stability) Economic indicators: GDP, inflation rate, etc. Monetary policy

Which type of exchange rate system did the video talk about? floating exchange rate

HW

RB, p. 65/II (Read the text) RB, p. 65/III