...Currency devaluation is good for a country In the recent year, the global financial crisis is more increasingly serious and many countries have become a victim. Consequently, currency devaluation is a considerable option to improve the status quo. Devaluation is viewed as a method of improving a country's "competitiveness", or in other words rendering domestically produces goods more attractive abroad while making foreign produced goods less attractive at home (Miles 1978, introduction 2). Supply-and-demand forces determine the exchange value of a currency in exchange markets which are fundamentally the result of the debit and credit items in the balance of payments (Gilbert 1979, 112). Historically, an issuing authority who certified the weight and purity of the precious metal published the early currencies--coins. A government in need of short on precious metal might abruptly lower the weight and purity of coins to devaluate the currency (from Wikipedia). After the Second World War, currency devaluation is a means as a counter-economic crisis and stimulates the development of economic in many countries. When a country face the balance of payments deficit, the strategy of local currency devaluation can be changed previous condition through the decrease of the currency exchange rate, which seems an advisable way to reduce the deviation of prices and to resume the contribution margin ration of exports commodities. Earlier devaluations are characterized by weak fundamentals,...
Words: 1744 - Pages: 7
...9/8/2015 Other People’s Dollars, and Their Place in Global Economics The New York Times http://nyti.ms/1N6VF74 The Opinion Pages | OPED COLUMNI ST Other People’s Dollars, and Their Place in Global Economics SEPT. 4, 2015 Paul Krugman Sydney, Australia — Soon after arriving here, I stopped at an A.T.M.; I needed some dollars, and all I had were dollars. O.K., weak joke. What I needed were Australian dollars — Aussies — not U.S. greenbacks. There are actually four Englishspeaking countries with dollars of their own; the others are the Canadian loonie and the New Zealand kiwi. And you can learn a lot about the global economy, busting some popular monetary myths, by comparing those currencies and how they serve their economies. All four dollar nations are, if you take the long view, highly successful economies. True, America is still recovering from its worst slump since the Great Depression, Canada is being hit hard by plunging oil prices and Australia is feeling nervous as its markets in China wobble. But we’re all wealthy nations that have weathered economic storms better than most of the rest of the world. While the dollar nations have all done well, however, they occupy very different positions in the world economy. In part, I mean that quite literally: http://www.nytimes.com/2015/09/04/opinion/paulkrugmanotherpeoplesdollarsandtheirplaceinglobaleconomics.html?rref=collection%2Fcolumn%2Fpa… 1/4 9/8/2015 Other People’s Dollars...
Words: 1061 - Pages: 5
...BOFIT Discussion Papers 19 • 2011 Zhichao Zhang, Nan Shi and Xiaoli Zhang China’s new exchange rate regime, optimal basket currency and currency diversification Bank of Finland, BOFIT Institute for Economies in Transition BOFIT Discussion Papers Editor-in-Chief Laura Solanko BOFIT Discussion Papers 19/2011 23.7.2011 Zhichao Zhang, Nan Shi and Xiaoli Zhang: China’s new exchange rate regime, optimal basket currency and currency diversification ISBN 978-952- 462-714-6 ISSN 1456-5889 (online) This paper can be downloaded without charge from http://www.bof.fi/bofit Suomen Pankki Helsinki 2011 BOFIT- Institute for Economies in Transition Bank of Finland BOFIT Discussion Papers 19/2011 Contents Abstract ................................................................................................................................................ 3 Tiivistelmä ........................................................................................................................................... 4 1 2 Introduction ................................................................................................................................ 5 Theoretical model ..................................................................................................................... 11 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 3 Policy goal .................................................................................................................... 12 Trade...
Words: 11867 - Pages: 48
...Hard and Soft Currencies Renita McBath MGT/448 University of Phoenix December 1, 2011 Professor David Grier Global Financing and Exchange Rate Mechanisms of Hard and Soft Currencies Trading, bartering, buying, and selling are known as the act doing business. The action of doing business has been a way of life for human beings for Centuries. At some point in our history the difficulty of doing business equally became a challenge. For instance, one person would like to trade a jar of jelly to another person that owns cows. The trade is off balance because of the value of each item. The difficulty arose when trying to access a credit. At this point, currency was born. In the beginning, currency was established by villagers in the form of stones, paper, linen, and other countable items. Nowadays humans have evolved currency into unique metal and paper items that have unique values. Currently these uniquely valuable currencies are referred to as hard and soft. Further research will reveal an analysis of the use of the currencies in global financing operations as well as describing the importance of managing risks that may arise. Hard Currency Hard currency is a status associated with the material, paper, and coins that are circulated within a country and globally in an effort to buy and sell goods. Currently, hard currency is the most traded currency. Countries that acquire this currency status attain...
Words: 1145 - Pages: 5
...The exchange rate An exchange rate is the rate at which one currency is exchanged on another one. This rate differs from country to country and depends on many economical variables, the main of which are the general balance and disbalance of economy, monetary and fiscal policy, the state of the budget, international policy, the condition and development of the country’s economy compared to the world situation and dominating countries, purchasing power of the currency, and other internal and external factors. The history of world exchange rate systems shows us that the world community (in its majority) has in fact shifted from the system of fixed exchange rates to floating exchange rate system. Currently there exist different combinations of floating and fixed exchange rate systems, together with specific economical instruments, created for exchange rate regulating. Since the development of production and a number of divisions of labor there existed such a phenomenon as commodity money. There was no other monetary system until 17th century when there appeared coins having an intrinsic value, not linked with commodity. Usually the value of the coin was associated with the content of gold in the coin. The exchange rate between different coins and different currencies depended on the content of gold in the coin as well, and equaled to the relative content of gold in the coins. In 17th century banks started issuing own banknotes which had the same purchasing power as...
Words: 2755 - Pages: 12
...various exchange rate systems. DEFINITION OF EXCHANGE RATE Exchange rate is defined as the rate at which one currency may be converted into another. The exchange rate is used when simply converting one currency to another (such as for the purposes of travel to another country), or for engaging in speculation or trading in the foreign exchange market. There are a wide variety of factors which influence the exchange rate, such as interest rates,inflation, and the state of politics and the economy in each country, also called rate of exchange or foreign exchange rate or currency exchange rate. (1). FLOATING EXCHANGE RATE SYSTEM In a floating exchange rate system, governments and central banks do not participate in the market for foreign exchange. The relationship between governments and central banks on the one hand and currency markets on the other is much the same as the typical relationship between these institutions and stock markets. Governments may regulate stock markets to prevent fraud, but stock values themselves are left to float in the market. The U.S. government, for example, does not intervene in the stock market to influence stock prices. The concept of a completely free-floating exchange rate system is a theoretical one. In practice, all governments or central banks intervene in currency markets in an effort to influence exchange rates. Some countries, such as the United States, intervene to only a small degree, so that the notion of a free-floating exchange rate...
Words: 4843 - Pages: 20
...Assignment Currency Devaluation Introduction Devaluation refers to a decrease in a currency's value. A currency devalues when its value declines in relation to one or more other currencies. It affects the demand for exports and imports. Currency devaluation is evaluated in terms of the foreign exchange rate. Exchange rate is the value between two currencies shows how much one currency is worth in terms of other currency. The depth and intensity of exchange rate volatility and its impact on the volume of international trade was recognized during 1970s when the world economy shifted from fixed exchange rate to free floating exchange rate. If the exchange rate volatility is higher, then it will generate uncertainty of the future profit from export trade. In this assignment we will discuss on such issues like exchange rate volatility I addition to currency devaluation and its impact on the volume of international trade of developing country focusing Bangladesh. This assignment is based on the exchange rate and its volatility in addition to devaluation that affect on the on international trade of Bangladesh. The concept of the study is taken from the academic activity of ECN-201 course instructed by Mrs. Nahid ferdousi, lecturer of Department of Business Administration of University of Asia Pacific. This paper consists of three parts. In first part we will give a short description of currency valuation and factors that affects the currency valuation, and then we animated...
Words: 4601 - Pages: 19
...If every country in the world used the same currency, the theories and techniques of International Finance would be unnecessary. But because there are so many different currencies in use throughout the world, it is essential that the international manager understands these theories and techniques" INTRODUCTION The traditional answer to the above statement should suggest that government could utilize their power in creating money, which would affect exchange rate, output prices or revenue. Still a lot of countries have developed interest in maintaining different currencies even when they have limited ability to create money, particularly money at a national differentiated growth rate. For example during the era where money was rated equivalent to the price of precious metals or were pegged to gold, exchange rates were fixed. This involves, the gold standard of the 19th and 20th centuries, and also at the time of the of the post war era during Bretton woods regime. Then most governments had limited abilities to create money mostly at national differentiated growth rates. It was really rare. However, it seems that the number of world currencies have increased so much together with the amount of countries over the past five decades, which will decline strongly within the next two decades. The question posed here is from an economic point of view, asks if we should aim for a halt in this process or should there be single global currencies or multiple major currencies with stringent...
Words: 2401 - Pages: 10
... The globalization of companies has created the need for greater understanding and utilization of foreign currencies. The importance of this understanding should not be underestimated. Many companies have seen their profits plummet from poor decisions concerning global financing and exchange rate mechanisms. Contrarily, companies have also seen the success that can be reached by making the right decisions at the right time. This paper will analyze and discuss one particular aspect of global financing: Hard and soft currencies. Definition Understanding global financing and exchange rate mechanisms begins with the basics of hard and soft currencies. According to BusinessDictionary.com, hard currency can be defined as a “stable, convertible currency…serves as means of payment settlements because they do not suffer from sharp exchange rate fluctuations.” (What is Hard Currency?, 2011) Examples of hard currencies include the Euro, US dollar, and the Japanese Yen. In contrast to hard currencies, soft currencies can be defined as a currency that belongs to a “small, weak, or wildly fluctuating economy and…is not in favor with foreign exchange dealers.” (What is Soft Currency?, 2011) Examples of this include Mexico, Iraq and Afghanistan. Typically, underdeveloped countries are known to have soft currencies. Global Financing Operations Currency exchange rates fluctuate every day. For instance, Mexico has a current exchange rate of about 13.369 pesos per 1...
Words: 700 - Pages: 3
...Axia College Material Appendix D Chapter 20 Questions Answer each of the following questions. 1. Why is an exporter that is to be paid in six months in a foreign currency worried about fluctuating foreign exchange rates? In export transactions the party that must receive a foreign currency in the future takes the risk that the currency’s value will change to its disadvantage. 2. Are there ways in which this exporter can protect itself? If so, what are they? They can have a contract locking in an agreed rate or forward hedge. 3. How does the credit or money market hedge work? Where companies or money managers study trends of foreign currencies and do forward hedges to make money from an inclining or declining currency. 4. Why is acceleration or delay of payments more useful to an IC than to smaller, separate companies? Because they can handle these transaction internally and not have to pay outside fees. 5. How would you accomplish exposure netting with currencies to two countries that tend to go up and down together in value? Two or more Currencies that are considered to balance one another. Basically, there are two ways to accomplish this: (1) currency groups and (2) a combination of a strong currency and a weak currency. 6. Why is the price adjustment device more useful to an IC than to smaller, separate companies? If an IC is of the coordinated, integrated type, there is much opportunity...
Words: 596 - Pages: 3
...These trimmed trees are then processed in GHC’s own sawmills and finishing plants, mainly located in an industrial town in the English Midlands. Its main markets are UK, western Europe, north America, the middle East and Australia GHC also owns 100% of the Real Furniture Company (RFC). RFC imports a range of hardwood and cane furniture, which is manufactured in overseas locations. The hardwood for RFC is imported from South America and Asia and is imported to other countries in finished form. Both ghc and rfc are handled separately. From the above introduction its quiet clear that ghc and rfc are two separate companies and I am going to now look into the financial practices and some other pros and cons of both companies. Further moving on to the discussions of GHC with the overseas Government, understanding the benefit expected by the overseas government from GHC and the benefits GHC request from the government, then looking into the risks associated with the investments made in the different countries of the world and at last moving on to the responsibilities that are assigned to the group treasurer and the...
Words: 2437 - Pages: 10
...INTRODUCTION: FOREX — the foreign exchange market or currency market or Forex is the market where one currency is traded for another. It is one of the largest markets in the world. Some of the participants in this market are simply seeking to exchange a foreign currency for their own, like multinational corporations which must pay wages and other expenses in different nations than they sell products in. However, a large part of the market is made up of currency traders, who speculate on movements in exchange rates, much like others would speculate on movements of stock prices. Currency traders try to take advantage of even small fluctuations in exchange rates. In the foreign exchange market there is little or no 'inside information'. Exchange rate fluctuations are usually caused by actual monetary flows as well as anticipations on global macroeconomic conditions. Significant news is released publicly so, at least in theory, everyone in the world receives the same news at the same time. Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX currency is expressed. For example, INR/USD is the price of the Indian rupees expressed in US dollars, as in Rs 1 = 0.0015 $. Foreign exchange reserves usually stores foreign currency and bonds held by the central banks of nations all...
Words: 5699 - Pages: 23
...Comparative Advantage (comparative costs). This theory, subsequently modified by John Stuart Mill, is the foundation of the theory of international trade. The trade between two countries takes place because the same commodity is produced at different costs in different countries. The differences in the cost of production arise because of differences in factor endowments in different countries and the degree of specialization. Thus trade relies on cost differences. The Doctrine of Comparative costs states that a country will benefit by specializing in the production of those commodities in which its comparative cost advantage is greater, exporting these commodities in exchange for commodities in which the comparative cost advantage is less. Panel (a) illustrates the fact that over the past 40 years, the United States has exported a steadily growing share of its GDP to other countries and imported a growing share of what it consumes from abroad. Panel (b) demonstrates that international trade is significantly more important to many other countries than it is to the United States, with the exception of Japan. B. Terms of Trade The rate at which one country’s goods exchange against the goods of another country is referred to as the Terms of Trade, When Country A enters into trade with Country B,...
Words: 2369 - Pages: 10
...1. Explain why another country would abandon its own currency and use the U.S. dollar as its official currency instead. Explain why such a policy will not work in the long run. 5 points Other countries abandon their own currencies in order to protect themselves from possible devaluation and inflation as well as reduce a number of risks they might have when it comes to foreign investments. Thus, by abandoning their own currency and using the U.S. dollar they are able to provide a more stable and secure economic and investment climate for their country. Also, by doing this, it helps that country's economic climate become more credible and it helps to encourage both local and foreign investors to invest money into that country and their capital market again 2. According to the text, freely floating exchange rate policy means that a country allows market forces to determine the value of its currency. I believe that this policy exist only on paper. Why do you think this is the case? 5 points. I think this is the case too because in some instances, if a currency value moves in any one direction at a rapid and continuous rate, governments who are represented by their central banks are able to and will intervene by buying and selling its own currency reserves in the foreign-exchange market in order to stabilize the local currency. Thus, in reality this policy really only exists on paper because central banks slightly still have the ability to intervene in the foreign exchange...
Words: 625 - Pages: 3
...Chinese Yuan Bilateral Currency Swap Agreements. Nowadays internationalization of renminbi rises as many counties try to lessen their dependence on U.S. dollar. P.B.O.C. uses different instruments to drive expansion of RMB, weakening the U.S. dollar monopoly in the basket of the world reserve currencies. By 2013, the RMB is the 8th most traded currency in the world. On 17 August 2010, PBoC issued policy to allow Central Bank, RMB offshore Clearing Banks and offshore Participating Bank to invest the excess RMB in debt securities, in onshore Inter-bank Bond Market. In October, China further open up both FDI and ODI in RMB (Pilot RMB Settlement of Outward Direct Investment) and nominated Xinjiang as the first pilot province (which in early 2011 expanded to 20 pilot areas). In June 2013, United Kingdom became the first G-7 country to set up an official currency swap line with China. As of July 2014, 25 countries have signed the RMB Bilteral Swap Ageeement with PBoC with total facilities of over ¥2.7 trillion. These agreements tell us that China decided to increase the role of RMB in the world currency market. 2007: Creation of Dim Sum bonds and offshore RMB bond market The dim sum bond market generally refers to RMB-denominated bonds issued in Hong Kong. The majority of dim sum bond are denominated in CNH, but some are linked to CNY (but paid in USD). In July 2007, dim sum bonds worth a total of US$657 million were issued for the first time by China Development Bank. These financial...
Words: 4016 - Pages: 17
