Transcript EXCHANGE RATES

EXCHANGE RATES
The exchange rate is ...
 the value of another country’s
currency
 a rate ....... which one ........ can be
exchanged for another
 the price ........ which one currency
can be bought.
Currencies:
the US dollar (US$)
the euro (€)
the yen(¥)
the renminbi (yuan – units!)
the British pound (£)
the kuna (HRK)
the dollar vs. 20,000 US dollars
The British pound slipped by around 3.5% against the
dollar and held steady against the euro in November.
Which of the three rates are described below?
FIXED, MANAGED FLOATING or FLOATING E.R.?
1.
2.
3.
4.
5.
6.
7.
8.
9.
a rate which is set by the government (central bank)
only........
a rate which is determined by the private market
through supply and demand ............
its value will decrease only if demand is low (and viceversa) .................
it does not change before it is centrally decided ...........
if the rate changes more than the central bank allows,
the bank intervenes (buys or sells the currency) ......
based on the free market only........
its value will rise only if demand is high .................
a combination of the other two types ............
example of intervention in the economy ............
Based on: http://www.investopedia.com/articles/03/020603.asp
Which of the three rates are described below?
FIXED, MANAGED FLOATING or FLOATING E.R.?
1.
2.
3.
4.
5.
6.
7.
8.
9.
a rate which is set by the government (central bank) only
FIXED (PEGGED) EXCHANGE RATE
a rate which is determined by the private market through
supply and demand FLOATING E.R.
its value will decrease only if demand is low (and vice-versa)
FLOATING E.R.
it does not change before it is centrally decided FIXED
if the rate changes more than the central bank allows, the
bank intervenes (buys or sells the currency) MANAGED
FLOATING EXCHANGE RATE
based on the free market only FLOATING EXCHANGE RATE
its value will rise only if demand is high FLOATING E.R.
a combination of the other two types MANAGED FLOATING E.R.
example of intervention in the economy FIXED E.R., MANAGED
FLOAT.
http://www.investopedia.com/articles/03/020603.asp
Which types of exchange rates are the
following sentences likely related to?
 A currency appreciates/depreciates
against another currency.
 If a currency is overvalued, it needs
to be devalued.
 If a currency is undervalued, it needs
to be revalued.
Types of exchange rates
FIXED
EXCHANGE
RATE
FLOATING
EXCHANGE
RATE
MANAGED
FLOATING
RATE
Which types of exchange rates are the
expressions below primarily related to?
to be pegged against...
gold convertibility
speculation
The Fed
IMF
supply & demand
central banks
freely
determined
M.Friedman
intervene
US dollar
reflecting purchasing
power parity
The period of gold convertibility
(MK: p.128)
 After World War II, an agreement
established 1 2 rates, defined in terms of
gold and the US dollar. Many currencies
were 3 4 the US dollar, and the dollar was
5 against gold. One US dollar could be 6
for 1/35th of an 7 of gold. Under this
system, 8 exchange rates could only be
adjusted with the agreement of the 9 10
11. Such adjustments were called 11 or
12. The system of gold 13 and 14 against
the dollar was abandoned in 1971 because
15 did not have enough gold to guarantee
its currency.
Pg. 2 (MK, p.128)
 Proponent
 Argue
 Underlying economic conditions,
economic realities
 Underestimate
Pg.3 (MK, p.129)
 PPP?
 5%
 95%
 3 or 4 reasons for currency transactions?
Match the words below:













appreciating/depreciating
currency
purchasing power
fixed/floating
devalued/revalued
common
hedge
raw
gold
futures
currency
central bank
speculative













fluctuations
contracts
currency
exchange rate
currency
intervention
materials
transactions
currency
against fluctuations
convertibility
transactions
parity
How do the red words relate to Pg. 4?













appreciating/depreciating
currency
purchasing power
fixed/floating
devalued/revalued
common
hedge
raw
gold
futures
currency
central bank
speculative













fluctuations
contracts
currency
exchange rate
currency
intervention
materials
transactions
currency
against fluctuations
convertibility
transactions
parity
Answer the questions:
 What was fixed in the fixed exchange
rate system after WW II?
 What was Milton Friedman’s view of
the exchange rates?
 Why was the euro introduced?
 To what extent is the managed
floating rate a solution to currency
fluctuations?
Reading: MK (pp.128-129)
 Which pgs. deal with specific types of
exchange rates?
 Find parts of the text that deal with
the floating rate in terms of the
following:
a) theoretical expectations
b) reality
c) attempts to resolve problems
A currency transaction tax (CTT)
A CTT would be collected from dealers in international
1... markets, by financial clearing and settlement
systems. The 2... was designed to slow down 3........
across borders, to make monetary 4...... more
effective, and to prevent or manage exchange rate
5...... . The CTT is not designed to change FX market
behaviour, but only to raise money without 6... the
market. But of course taxing FX transactions would
increase the spread (difference between the 7... and
the 8... prices at which trades would be profitable,
and so would reduce the number of transactions.
The proposed tax 9… is 0.5 10 … . Such a CTT on all
major currencies would 11 ... an annual 12... of over
$33bn. Governments should think how to spend the
13.... of this tax. (MK: p.130)
Tobin Tax
vs.
CTT
 A proposal has been made to …
 The idea behind … is to …
 The CTT, on the contrary, is not
designed to …, but only to …