4 1. Actors in the Foreign Exchange Market t______________________ g______________________ s______________________ i______________________ 2. Items affecting a currency rate: _________________________ law _______________interest rates _______________situation ______________indicators: ______ _________
5 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
6 FOREIGN EXCHANGE RATES Necessary for foreign trade/economic transactionDetermined by demand and supply(tourism,investmentimport/exporttrade in currencies)
7 A strong kuna is bad for exporters, good for importers the increased kuna > more expensive exports > fewer sales> fewer profitsthe strong kuna > cheaper import of foreign products> cheaper import of raw materials cheaper> the production costs lower> must reduce domestic prices> lower profitsfewer exports more importsbad Balance of Payments
8 Demand – when we purchase foreign goods/servicesSupply – when we exportMarket forces move the rate up or down to balancethe inflows and outflows of a currency
9 output/inflation/foreign trade governments try to regulate exchange rates affectoutput/inflation/foreign tradegovernments try to regulateexchange markets to improve foreign tradedevaluation = decrease the value of a currency in a fixed systemrevaluation = increase the value of a currency in a fixed systemappreciation = increase in value over a period of timedepreciation = fall in the value over a period of time
10 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)
11 Pegged currenciesto peg = to fix against something (gold, another currency) soft currencies (kuna, pesos…) must be pegged to hard currencies
12 EXCHANGE RATE SYSTEMS1. The gold standard 2. Freely floating exchange rates 3. Managed exchange rates
13 1. THE GOLD STANDARD the Bretton Woods agreement, 1944 fixed exchange rates defined interms of gold and the US dollarcurrencies could only be adjustedby the IMF (devaluated/revaluated)abandoned in 1971 (not enough gold)
14 2. FLOATING EXCHANGE RATES determined by supply and demandreflect a country’s balance of paymentsand rate of inflationcurrency speculation, the value of currencies is constantly fluctuating on foreign exchange markets
15 3. MANAGED EXCHANGE RATES governments and central banks influence the level of their currencies when necessarygovernments buy or sell in order to increase ordecrease the value of their currencies(use their foreign currency reserves)
16 COMMON CURRENCY (SINGLE CURRENCY) the euro – 2002stable and certain economic environment
17 What is the Forex Market?What happens with changing economies?Give an example with the kuna and the euro.
18 Gold ________________ ended in the early 1970s. ADD APPROPRIATE WORDS TO THESE SENTENCES: revaluation, floating, managed, speculators, convertibility, peg, centralGold ________________ 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.
19 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.