Currency basket, systems of exchange rate, technical analysis Katarína Koncošová

Currency Is a generally accepted form of money, including coins and paper notes, which is issued by a government and circulated within an economy. Used as a medium of exchange for goods and services, currency is the basis for trade.

Generally speaking, each country has its own currency. For example, Switzerland´s official currency is the Swiss franc, and Japan´s official currency is the yen. An exception would be the euro, which is used as the currency for several European countries.

Currency basket Definition A group of securities whose weighted average is used to determine the value of an obligation or the value of another country. For instance, a country that does not peg the value of its currency to a single other currency, such as the U.S. dollar, could value its currency to the value of a currency basket comprised of Euros, U.S. dollars, and Japanese Yen.

A select group of currencies whose weighted average is used as a measure of the value or the amount of an obligation. A currency basket functions are a benchmark for regional currency movements – its composition and weighting depends on its purpose.

A currency basket is commonly used in contracts as a way of avoiding ( minimizing) the risk of currency fluctuations. The European Currency Unit ( which was replaced by the euro) and the Asian Currency Unit are examples of currency basket.

Currency swap A swap that involves the exchange of principal and interest in one currency for the same in another currency. It is considered to be a foreign exchange transaction and is not required by law to be shown on the balance sheet.

Exchange rate An exchange rate is the rate at which one currency can be exchanged for another. In other words, it is value of another country´s currency compared to that of your own.

System ´s of exchange rate: Fixed exchange rate Floating exchange rate

Fixed Exchange Rate System Rate that government ( CB) sets and maintains as the official exchange rate. A set price will be determined against a major world currency ( usually the U.S. dollar, but also other major world currencies such as the euro, the yen or the basket of currencies). In order to maintain the local exchange rate, the central bank buys and sells its own currency in the foreign exchange market in return for the currency to which is pegged

Advantages of a fixed exchange rate Elimination of exchange rate risk, which can greatly enhance international trade and investment It imposes on a country´s monetary authority

Reserve Currency Standard In a reserve currency system, another country’s currency takes the role that gold played in a gold standard. In other words a country fixes its own currency value to a unit of another country’s currency. In the gold standard the central bank held gold to exchange for its own currency, with a reserve currency standard it must hold a stock of the reserve currency. Always, the reserve currency is the currency to which the country fixes. A reserve currency standard is the typical method for fixing a currency today. Most countries that fix its exchange rate will fix to a currency that either is prominently used in international transactions or is the currency of a major trading partner.

For example, suppose Britain decided to fix its currency to the dollar at the exchange rate E$/£ = To maintain this fixed exchange rate, the Bank of England would stand ready to exchange pounds for dollars (or dollars for pounds) upon demand at the specified exchange rate. To accomplish this, the Bank of England would need to hold dollars on reserve in case there was ever any excess demand for dollars in exchange for pounds on the FOREX.

Other Fixed Exchange Rate Variations Basket-of-Currencies - Countries that have several important trading partners, or who fear that one currency may be too volatile over an extended period of time, have chosen to fix their currency to a basket of several other currencies. This means fixing to a weighted average of several currencies. Example of a composite currency is found in the SDR. SDR stands for special drawing rights. It is a composite currency created by the International Monetary Fund (IMF). One SDR currently consists of a fixed quantity of US dollars, Euros, Japanese yen, and British pounds.

Crawling Pegs A crawling peg refers to a system in which a country fixes its exchange rate, but also changes the fixed rate at periodic or regular intervals. Central bank interventions in the FOREX may occur to maintain the temporary fixed rate. However, central banks can avoid interventions and save reserves by adjusting the fixed rate instead. Since crawling pegs are adjusted gradually, they can help eliminate some exchange rate volatility without fully constraining the central bank with a fixed rate.

Pegged Within a Band In this system a country specifies a central exchange rate together with a percentage allowable deviation, expressed as plus or minus some percentage.

Currency Boards A currency board is a legislated method to provide greater assurances that an exchange rate fixed to a reserve currency will indeed remain fixed. In this system the government requires that domestic currency is always exchangeable for the specific reserve at the fixed exchange rate. The central bank authorities are stripped of all discretion in the FOREX interventions in this system. As a result they must maintain sufficient foreign reserves to keep the system intact.

Dollarization/Euroization The most extreme and convincing method for a country to fix its exchange rate is to give up one’s national currency and adopt the currency of another country. In creating the Euro-zone among 12 of the European Union countries, these European nations have given up their own national currencies and have adopted the currency issued by the European Central Bank. This is a case of Euroization. Since all 12 countries now share the Euro as a common currency, their exchange rates are effectively fixed to each other at a 1-1 ratio. As other countries in the EU join the common currency, they too will be forever fixing their exchange rate to the Euro. (Note however, that although all countries who use the Euro are fixed to each other, the EUro itself floats with respect to external currencies such as the US dollar.

Technical Analysis A method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysis do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity.

The methods used to analyze securities and make investment decisions fall into two very broad categories: fundamental analysis and technical analysis.fundamental analysistechnical analysis Fundamental analysis involves analyzing the characteristics of a company in order to estimate its value. Technical analysis takes a completely different approach; it doesn't care one bit about the "value" of a company or a commodity. Technicians (sometimes called chartists) arechartists only interested in the price movements in the market.

Despite all the fancy and exotic tools it employs, technical analysis really just studies supply andsupply demanddemand in a market in an attempt to determine what direction, or trend, will continue in the future.trend In other words, technical analysis attempts to understand the emotions in the market by studying the market itself, as opposed to its components. If you understand the benefits and limitations of technical analysis, it can give you a new set of tools or skills that will enable you to be a better trader or investor.

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