1. Exchange rates
MK, Unit 26
+Handout

2. How would you define exchange rates?
The price of one country's currency expressed in another country's currency.
Investopedia.com

3. Research the following question in a group
What are the main types of exchange rate regimes?
Investopedia.com

4. Read MK p. 128 and answer these questions:
What are the main types of exchange rate regimes?
How did gold convertibility work? Why did it end?
What is a fixed exchange rate system?
What does a floating exchange rate system mean?
What are its advantages and disadvantages?
Do freely floating exchange rates function as, e.g., Friedman predicted?
How does speculation on the currency market affect industry?
Why was the euro established?
How do governments and central banks try to manage floating exchange rates?
Bretton Woods: set up IMF, World Bank. Exch rates of IMF members pegged to the $, w/ 1% variation. Rates could be adjusted if balance of payments is in disequilibrium. 1971: inflation, financing of Vietnam war Nixon devalued the $  shattered confidence in the fixed exchange rate. By 1973: all main currencies are floating.

5. Par. 5
A managed floating exchange rate is an exchange rate that is allowed to fluctuate due to supply and demand factors but can sometimes be altered by the government or the central bank.

6. Explain these sentences
Explain these sentences. Pay special attendtion to the underlines phrases.
“In theory exchange rates should give purchasing power parity.”
Financial institutions, companies and rich individuals all buy currencies, looking for either higher interest rates or short-term capital gains if the currency appreciates.”
“Although it is possible to some extent to hedge against currency fluctuations by way of futures contracts, forward planning is difficult when [prices] can rise rapidly.”

7. Put these terms into 3 groups
Fixed exchange rates
Freely floating exchange rates
Managed floating e. r.
Supply and demand
Gold convertibility
Foreign currency reserves
speculation
intervention by the gov./ central bank
Devalue
depreciate
deregulated financial systems
Created to reflect purchasing power parity
pegging against the dollar/euro
appreciate
Revalue

8. Freely floating exchange rates
Fixed exchange rates
Freely floating exchange rates
Managed floating e. r.
Gold convertibility
pegging against the dollar/euro
Revalue
Devalue
Deregulated financial systems
Supply and demand
Created to reflect purchasing power parity
Speculation
Depreciate
Appreciate
Intervention by the gov./central bank + supply/demand
Foreign currency reserves

9. Explain the difference between the following pairs of terms:
Fixed exchange rates
freely floating exchange rates
Devaluation
Appreciation
floating exchange rates
managed floating exchange rates
Revaluation
Depreciation

10. Fill in the gaps with the help of the reading
You can exchange a currency ___ an other ___ a certain rate.
Post-WWII major currencies were pegged ___ the dollar.
Floating exchange rates are determined ___ supply and demand.
Friedman argues that currencies would settle ___ stable rates.

11. Fill in the gaps with the help of the reading
You can exchange a currency for an other at a certain rate.
Post-WWII major currencies were pegged against the dollar.
Floating exchange rates are determined by supply and demand.
Friedman argues that currencies would settle at stable rates.

12. What do you know about the foreign exchange market?
What are the other names of the foreign exchange market?
Forex market
Currency trading market fx
Where is it situated?
No central location, a network of international brokers and dealers.

13. Listen and watch
Common Craft about The Foreign Exchange Market - Realized by Fabienne Deville (Assistant Professor in Finance) with the help of the NTE team, HEC-ULg - Voice by David Homburg

14. Answer the questions based on the video:
What determines the value of the £ against the €?
Who are the actors on the foreign exchange market?
What factors affect a currency’s exchange rate?
Which type of exchange rate system was video about?

15. Answers: Who are the actors on the foreign exchange market?
Companies (import – export of goods and services)
States
Investors
Speculators
Tourists (travel)
Financial institutions

16. Answers: What factors affect a currency’s exchange rate?
Supply and demand
Interest rates
Political situation of the country (stability)
Economic indicators: GDP, inflation rate, etc.
Monetary policy
Which type of exchange rate system did the video talk about?
floating exchange rate

17. HW
RB, p. 65/II (Read the text)
RB, p. 65/III