Exchange Rates

is the rate at which one currency will be exchanged for

another.
 Factors that influence exchange rate

interest rates The interest rate is the amount charged on top of the principal by a lender to a borrower for the use
of assets.

inflation rate

trade balance

political stability
internal harmony

high degree of transparency in the conduct of leaders

and administrators

general state of economy

quality of governance.
ld
1 Convertibility

Convertibility is the quality that allows

money or other financial instruments
to be converted into other
Market
2 Forces

the actions of buyers and sellers that cause the

prices of goods and services to change without
being controlled by the government; the economic
forces of supply and demand
rity
3 and Speculation
Parity is an Equality or constant relationship
between buying power, prices, wages, and rate of
exchange of a currency.
Price fluctuations are upward or downward swings in
the prices of products in an economy.
Speculation involves trading a financial instrument
involving high risk, in expectation of significant returns.
The motive is to take maximum advantage from
nteracting
4 Speculation
Counteracting to reduce or remove the effect of
something unwanted by producing an opposite
effect
Speculation involves trading a financial instrument
involving high risk, in expectation of significant
returns. The motive is to take maximum advantage
from fluctuations in the market.
arket
5 Intervention

Is an action taken by a government or international

institution in a market economy in an effort to impact
the economy beyond the basic regulation of fraud and
enforcement of contracts and provision of public
goods.
1. What was Gold Convertibility
A system in which the Federal Reserve could exchange gold for all the paper
money

2. Why did gold convertibility end in 1971

Because of Inflation
3. How is a floating exchange rate determined
By the number of buyers and sellers
4. What would happen if currencies were correctly valued
The cost of a given selection of goods and services would be the same
5. Why do speculators buy foreign currencies
To get a higher interest rate or make a capital again
6. What proportion of currency transaction are speculative?
About 95%

7. How can companies try to protect themselves against currency fluctuation?

By buying future contract
8. How can the government attempt to influence the value of their currency?
By buying or selling their currency on the exchange markets
9. Why are governments’ or central banks’ attempts to influence exchange
rates not very successful?
Because speculators have much more money than governments
To Increase the value of a currency in an otherwise Revalue
fixed system
To decrease the value of a currency in an otherwise fixed system Devalue
Adjective describing a rate that changes or varies Floating
People who argue in favour of something Proponents
To fall in value an a market system Depreciate

To rise in value an a market system Depreciate

To attempt to protect oneself against future price change Hedge

Continuous changes in a price or value Fluctuations

Agreements to buy something at a fixed price Future contract
several months ahead