EXCHANGE
RATES
EXCHANGE RATE
The price at which one currency
can be exchanged/traded for
another
1. Actors in the Foreign Exchange Market
http://www.youtube.com/watch?v=-qvrRRTBYAk
t______________________
g______________________
s______________________
i______________________
s______________________
2. Items affecting a currency rate:
_________________________ law
_______________interest rates
_______________situation
______________indicators: ______ _________
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
FOREIGN EXCHANGE RATES
 Necessary for foreign trade/economic transaction
 Determined by demand and supply
(tourism,
investment
import/export
trade in currencies)
A strong kuna is bad for exporters,
good for importers
 the increased kuna > more expensive exports > fewer sales
> fewer profits
 the strong kuna > cheaper import of foreign products
> cheaper import of raw materials cheaper
> the production costs lower
> must reduce domestic prices
> lower profits
fewer exports
more imports
bad Balance of Payments
 Demand – when we purchase foreign
goods/services
 Supply – when we export
 Market forces move the rate up or down to balance
the inflows and outflows of a currency
 exchange rates affect
output/inflation/foreign trade
 governments try to regulate
exchange markets to improve foreign trade
devaluation =
revaluation =
appreciation =
depreciation =
decrease the value of a currency in a fixed system
increase the value of a currency in a fixed system
increase in value over a period of time
fall in the value over a period of time
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
 fixed exchange rates defined in
terms of gold and the US dollar
 currencies could only be adjusted
by the IMF (devaluated/revaluated)
 abandoned in 1971 (not enough gold)
2. FLOATING EXCHANGE RATES
 determined by supply and demand
 reflect a country’s balance of payments
and rate of inflation
 currency speculation, the value of currencies is constantly
fluctuating on foreign exchange markets
3. MANAGED EXCHANGE RATES
 governments and central banks influence the level
of their currencies when necessary
 governments buy or sell in order to increase or
decrease the value of their currencies
(use their foreign currency reserves)
http://www.youtube.com/watch?v=itYnQzrTCgE&feature=related
What is the Forex Market?
http://www.youtube.com/watch?v=m_muYXqjNAk&feature=related
What happens with changing economies?
Give an example with the kuna and the euro.
http://www.youtube.com/watch?v=RK-03L6XVWw&feature=related
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.