Transcript exchange rates

EXCHANGE RATE
The price at which one currency
can be exchanged/traded for
another
1. Who and what affects currency rate?
http://www.youtube.com/watch?v=qvrRRTBYAk
TERMS TO BE EXPLAINED.....
• Purchasing power parity
• Convertibility
• Pegged currency
Purchasing power parity
(PPP)
A rate of exchange calculated for two
currencies so that the amount paid for
a range of goods and services in both
countries is the same
Convertible currency
= money of one country that can easily be
changed into the money of another country,
especially into a strong currency
(the dollar, the euro, the pound, the yen)
Pegged currencies
to peg = to fix against something
(gold, another currency)
soft currencies (kuna, pesos…)
must be
pegged to hard currencies
EXCHANGE RATE SYSTEMS
1. The gold standard
2. Freely floating exchange rates
3. Managed exchange rates
1. THE GOLD STANDARD
 the Bretton Woods agreement, 1944
most major currencies were fixed against the US
dollar
 fixed exchange rates defined in
terms of gold and the US dollar
 currencies could only be adjusted
by the IMF (devalued/revalued)
 abandoned in 1971 (inflation - not enough gold to
guarantee its currency)
2. FLOATING EXCHANGE RATES
(plutajući tečaj)
 determined by supply and demand (it is worth whatever
buyers are willing to pay for it)
 Supply and demand is caused by foreign investment, import/export
ratios, inflation and other economic factors
 The floating exchange rates show the strength of a country’s
economy (the more valuable a currency is, the stronger that country’s
economy)
 This balance is sometimes upset by speculators who buy and sell
currencies to make a profit
 A country’s central bank can intervene in the foreign exchange market
(or forex) to correct short-term fluctuations in the value of its currency
by buying or selling it
3. MANAGED EXCHANGE RATES (fiksni
tečaj)
 the exchange rate is determined and maintained
by the government
governments and central banks influence the
value level of their currencies when necessary
 governments buy or sell in order to increase
(revalue) or decrease (devalue) the value of their
currencies
Floating or managed exchange rate
system?
•
•
•
•
To depreciate
To appreciate
To revalue
To devalue
• MacKenzie, , UNIT 26
p. 128-129
ADD APPROPRIATE WORDS TO THESE SENTENCES:
revaluation, floating, managed, speculators, convertibility, peg, central
1.
2.
3.
4.
5.
6.
Gold ________________ ended in the early 1970s.
In fact we have ___________ floating exchange rates, because
governments and __________banks sometimes intervene on
currency markets.
Another verb for fixing exchange rates against something else
is to ________ them.
Increasing the value of an otherwise fixed exchange rate is
called ___________________.
A currency can appreciate if lots _______________ buy it.
In most western countries there is a system of
___________exchange rates determined by supply and
demand.
1.
2.
3.
4.
5.
6.
Gold convertibility ended in the early 1970s.
In fact we have managed floating exchange rates,
because governments and central banks sometimes
intervene on currency markets.
Another verb for fixing exchange rates against something
else is to peg them.
Increasing the value of an otherwise fixed exchange rate
is called revaluation.
A currency can appreciate if lots speculators buy it.
In most western countries there is a system of floating
exchange rates determined by supply and demand.