...Effectiveness of Fiscal Policy under Both Fixed and Floating Exchange Rates using IS-LM-BP Model In order to examine the degree in which fiscal policy can be used effectively in this model, the variables that directly influence the outcomes of its use need to be identified. These are, exchange rate regime whether fixed of flexible that is in place and the degree that capital is mobile. The level of capital mobility is how challenging or simple it is for private individuals or firms to move funds across borders. Exchange rate regimes fall into two categories fixed and flexible, flexible exchange rate means that it is determine by supply and demand factors of said currency. In a fixed exchange rate scheme the value of the domestic exchange rate is fixed to a certain level, often to another currencies price or other commodity this can make trade between the given economy easier. Here is 8 combinations of fixed and flexible exchange rate and levels of capital mobility and how the outcomes show the effectiveness or ineffectiveness of the fiscal policy expansion policy implementation. Fiscal Expansionary Policy within a Flexible Exchange Rate Scheme with Somewhat Mobile Capital The mobility of the capital can be determine by the steepness off the BP curve, the steeper the curve the more mobile the capital as it is in this case. The expansionary policy is implemented and shifts the IS curve from IS1 to IS2 moving the equilibrium point from A to B, this leads to an overall deterioration...
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...EXCHANGE RATE REGIMES The exchange rate regime is the way a country manages its currency in respect to foreign currencies and the foreign exchange market. In other words, the exchange rate regime tells us how exchange rate is determined in one country. In theory, there are three basic types of exchange rate regimes: a fixed exchange rate, which ties the currency to another currency, mostly more widespread currencies such as the U.S. dollar or the euro, a floating exchange rate, where the market dictates the movements of the exchange rate, and a pegged float, where the central bank keeps the rate from deviating too far from a target band or value. In this essay, we will discuss more deeply about each type of exchange rate regime and also point out their advantages and disadvantages. Firstly, about fixed exchange rate. A fixed rate is a type of exchange rate regime in which the government (central bank) sets and maintains as the official exchange rate used to stabilize the value of a currency against the currency it is tied to. To fix the rate, typically, a government maintaining a fixed exchange rate by either buying or selling its own currency in the market. This is one reason governments maintain reserves of foreign currencies. For instance, if the equilibrium exchange rate drifts too far above the desired rate, the government sells foreign currency, thus decreasing its foreign reserves. Fixed rate has some advantages. First, it reduces risks related to fluctuation in rate...
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...A managed float is also known as a a. Fixed exchange rate system b. Pegged exchange rate system c. Dirty float exchange rate system d. Floating exchange rate system 1. According to some analysts, under a _____ regime, countries are limited in their ability to use monetary policy to expand or contract their economies by the need to maintain exchange rate parity. a. Fixed exchange rate b. Managed float c. Floating exchange rate d. Dirty float 2. A foreign debt crisis a. Occurs when a speculative attack on the exchange value of a currency results in a sharp depreciation in the value of the currency b. Is a situation in which a country cannot service its debt obligations c. Refers to a loss of confidence in the banking system that leads to a run on banks, as individuals withdraw their deposits d. Is a situation in which consumer spending patterns significantly affect a country's balance of payments, thereby affecting its currency 3. A _____ means the value of the currency is fixed relative to a reference currency. a. Fixed exchange rate b. Floating exchange rate c. Pegged exchange rate d. Dynamic exchange rate 4. A fixed exchange rate regime a. Leads to a situation where governments under political pressures expand monetary supply too rapidly, causing unacceptably high price inflation b. Modeled...
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...The Trade-Weighted Effective Exchange Rate Index, a common form of the effective exchange rate index, is a multilateral exchange rate index. It is compiled as a weighted average of exchange rates of home versus foreign currencies, with the weight for eachforeign country equal to its share in trade. Depending on the purpose for which it is used, it can be export-weighted, import-weighted, or total-external trade weighted. The trade-weighted effective exchange rate index is an economic indicator for comparing the exchange rate of a country against those of their major trading partners. By design, movements in the currencies of those trading partners with a greater share in an economy's exports and imports will have a greater effect on the effective exchange rate. In a multilateral, highly globalized, world, the effective exchange rate index is much more useful than a bilateral exchange rate, such as that between the Australian dollar and the United States dollar, for assessing changes in the competitiveness due to exchange rate movements. The invisible balance or balance of trade on services is that part of the balance of trade that refers to services and other products that do not result in the transfer of physical objects. Examples include consulting services, shipping services, tourism, and patent license revenues. This figure is usually generated by tertiary industry. The term 'invisible balance' is especially common in the United Kingdom. For countries that rely on service...
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...Arguments against flexible exchange rates include the arguments that they cause uncertainty, they inhibit international trade and that they allow destabilizing speculation. Arguments against fixed rates include that they cause uncertainty, they inhibit international trade and they allow destabilizing speculation. Contrast the situation in one country with a fixed exchange rate with one country that has a floating rate and explain the impact of the fixed and floating rates. Introduction Prior to 1970, fixed, or say pegged exchange rate regime was adopted by almost all countries worldwide. Afterwards, some countries have gradually made the transition from fixed to flexible exchange rates, which allow currency to float freely. In the following section, the definition of both fixed and flexible exchange rates will be introduced. Thereafter, the situation in Australia, which floating exchange rate regime will be compared with that of in Hong Kong, which uses fixed exchange rate regime. Moreover, the impact of different exchange rate regimes on economic entities will be discussed. Types of exchange rate Fixed/Pegged exchange rate A fixed exchange rate is usually pegged the value of a currency to a strong foreign currency such as US dollar or Euro (Hunt and Terry, 2011). This kind of rates is sets and maintained by the local government (e.g. central bank). In order to maintain a stable rate, the government trades its own currency on the foreign exchange market in return for the...
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...International Finance “Countries with pegged exchange rates are able to grow faster than countries with floating exchange rate” Introduction Exchange rate is a term which is defined by the two components that include the domestic currency and a foreign currency. It’s a price for which the currency of a country can be exchanged for another country’s currency. There are two types of exchange rates, Fixed or pegged exchange rate and floating or fluctuating exchange rate. A floating exchange rate is describes as a type of exchange rate regime wherein a currency’s value is allowed to fluctuate according to the foreign exchange market. The currency is known as floating currency if it is using a floating exchange rate system. The dollar is a great example of a floating currency. The rate or the price of a currency in floating exchange rate is determined by the simple rule of demand and supply in the foreign exchange market. The currency is free to fluctuate according to the changes in demand and supply of foreign currency. On the other hand fixed or pegged exchange rate is another type of exchange rate in which the price of exchange of a currency is fixed or pegged in terms of gold or another currency. There is complete government control in fixed exchange rate system as only government has the power to change it. The economists founded by the annual observations for 183 countries over the period of 1974 to 2000, using a long run Gross Domestic Product growth equation regarding...
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...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...
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...1.1 Introduction: Rate at which one currency may be converted into another. The exchange rate is used when simply converting one currency to another currency 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 it also called rate of exchange or foreign exchange rate or currency exchange rate. 1.2 Objective of the Report: The primary objective of this report is to know the over functions of government in foreign exchange market. But the objective behind this study is something broader. Objectives of the study are summarized in the following manner: • To describe the exchange rate systems used by various government. • To explain how government can use direct and indirect intervention influence exchange rates. • To study existing government control over exchange rate system. • To know how government can affect economic conditions. • To have some theoretical exposures that will be helpful for our future career. 1.3 Methodology: For preparing this report, we have undergone group discussion, collected data from internet. We also studied different circulars and reference books on this topic. We hope these criteria will be enough to find out different picture of government influence on exchange rate system. 1.4 Limitations of the Study: 1. The time, 1(One) week...
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...CHAPTER 7 Swaps Practice Questions Problem 7.1. Companies A and B have been offered the following rates per annum on a $20 million five-year loan: | |Fixed Rate |Floating Rate | |Company A |5.0% |LIBOR+0.1% | |Company B |6.4% |LIBOR+0.6% | Company A requires a floating-rate loan; company B requires a fixed-rate loan. Design a swap that will net a bank, acting as intermediary, 0.1% per annum and that will appear equally attractive to both companies. A has an apparent comparative advantage in fixed-rate markets but wants to borrow floating. B has an apparent comparative advantage in floating-rate markets but wants to borrow fixed. This provides the basis for the swap. There is a 1.4% per annum differential between the fixed rates offered to the two companies and a 0.5% per annum differential between the floating rates offered to the two companies. The total gain to all parties from the swap is therefore [pic]% per annum. Because the bank gets 0.1% per annum of this gain, the swap should make each of A and B 0.4% per annum better off. This means that it should lead to A borrowing at LIBOR [pic]% and to B borrowing at 6.0%. The appropriate...
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...Currency Exchange: Floating Rate Vs. Fixed Rate Exam Preparation Economics Did you know that the foreign exchange market (also known as FX or forex) is the largest market in the world? In fact, more than $3 trillion is traded in the currency markets on a daily basis, as of 2009. This article is certainly not a primer for currency trading, but it will help you understand exchange rates and fluctuation. What Is an Exchange Rate? An exchange rate is the rate at which one currency can be exchanged for another. In other words, it is the value of another country's currency compared to that of your own. If you are traveling to another country, you need to "buy" the local currency. Just like the price of any asset, the exchange rate is the price at which you can buy that currency. If you are traveling to Egypt, for example, and the exchange rate for U.S. dollars is 1:5.5 Egyptian pounds, this means that for every U.S. dollar, you can buy five and a half Egyptian pounds. Theoretically, identical assets should sell at the same price in different countries, because the exchange rate must maintain the inherent value of one currency against the other. Fixed Exchange Rates There are two ways the price of a currency can be determined against another. A fixed, or pegged, rate is a rate the government (central bank) 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 currencies...
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...competitive devaluations. The Bretton Woods system of fixed exchange rates was established in 1944. The U.S. dollar was the central currency of this system; the value of every other currency was pegged to its value. Significant exchange rate devaluations were allowed only with the permission of the IMF. The role of the IMF was to maintain order in the international monetary system to avoid a repetition of the competitive devaluations of the 1930s and to control price inflation by imposing monetary discipline on countries. The fixed exchange rate system collapsed in 1937, primarily due to speculative pressure on the dollar following a rise in U.S inflation and a growing U.S. balance-of-trade deficit. Since 1973 the world has operated with a floating exchange rate regime, and exchange rates have become more volatile and far less predictable. Volatile exchange rate movements have helped reopen the debate over the merits of fixed and floating systems The case for a floating exchange rate regime claims that such a system gives countries autonomy regarding their monetary policy and that floating exchange rates facilitate smooth adjustment of trade imbalances. The case for a Fixed exchange rate regime claims that the need to maintain a fixed exchange rate imposes monetary discipline on a country; floating exchange rate regimes are vulnerable to speculative pressure, the uncertainty that accompanies floating exchanges rates dampens the growth of international trade and investment...
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...Contents: Interest rate swap basics2 Excel work4 References8 Interest rate swap basics Swaps, being highly liquid derivatives, are not traded on stock exchange, but facilitated by over-the-counter (OTC) trading. Interest rate swap is an arrangement between two parties whereby they exchange one set of interest payment for another. The most widespread arrangement is when fixed-rate interest payments are exchange for floating-rate interest payment on some notional amount over the time. This notional amount is generally not exchanged between counterparties, but is used only for calculation of the size of cash flows to be exchanged, and what is more, usually only resulting cash flow (difference between fixed and floating interest rate payments) is paid. The simplest swap structure is a vanilla interest rate swap, in which one party receives a fixed interest rate agreed in advance and the other party a variable interest rate. The provisionы of such a swap are the following: • Notional (value to which interest rates are applied to) • Fixed interest rate • Floating interest rate • Frequency of payments • Contract period Most swaps are arranged so that their value is zero at the starting date. For US dollar swaps, floating rates are typically the 3-month or 6-month LIBOR rates prevailing over the period before the interest payment is made. The interest rates are determined in advance or equivalently, the payments are made in arrears. In practice, there are many...
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...Business- Impact of Interest Rate Swaps Get Tutorial by Clicking on the link below or Copy Paste Link in Your Browser https://hwguiders.com/downloads/bus-250-international-business-impact-interest-rate-swaps/ For More Courses and Exams use this form ( http://hwguiders.com/contact-us/ ) Feel Free to Search your Class through Our Product Categories or From Our Search Bar (http://hwguiders.com/ ) Review the ABS swaps attachment and design a swap that could potentially be used in your company acquisition in the following countries: Japan, China, and the United Kingdom (UK). In a 3-5 APA paper provide an analysis to Dorchester, Inc. management advising them of the swap options you have selected and why it would be suitable for the acquisition. http://interestrateswaps.info/ ABS Swaps Swap Funds Flows in a Typical Asset Backed Commercial paper Conduit: In the above example, The Issuer sells receivables to a Special Purpose Vehicle that is a bankruptcy-remote entity. This means that it cannot be consolidated into the bankruptcy estate of the Issuer if the Issuer were to file for bankruptcy. The SPV issues Certificates to the Conduit in exchange for cash. The conduit raises the cash to pay for the Certificates by issuing commercial paper. The Swap transaction is required because the portfolio of receivables that has been sold and converted into Certificates is a portfolio of fixed rate receivables. They are being funded with floating rate commercial paper creating...
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...ASSIGNMENT 1. WHAT IS AN EXCHANGE RATE POLICY? 2. WHY WOULD YOU RECOMMEND THE ADOPTION AND IMPLEMENTATION OF A GIVEN EXCHANGE RATE POLICY TO THE BUHARI LED ADMINISTRATION IN NIGERIA? JANUARY, 2016 1. Exchange rate policy can be refers to the policy or manner or way in which a country manage its currency in respect to other countries currencies. This policy may affect aggregate demand in an economy through its effect on export and import prices and policy makers may exploit this connection. Exchange rates can be determined under this policy in two main ways; either by government or by market forces. When it is determined by government, it is called administered or fixed or pegged. When it is determined by market forces (i.e. the forces of demand and supply), it is called flexible or floating exchange rate because the rate move freely up and down depending on the strength of the forces of demand and supply. But there are two types of flexible or floating exchange rate policies and that treating them as one can be misleading. They are the free floating exchange rate policy and the managed exchange rate policy. The free floating exchange rate policy and the fixed exchange rate policies are two extremes of the approaches to exchange rate determination. The manage floating exchange rate policy lies in between the two extremes. So far, three broad exchange rate policies have been suggested and tried; the fixed, the floating and the managed floating exchange rate policies. 2. Of these...
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...the economic implications and foreign exchange risk of the system of exchange rate for multinational companies with subsidiaries which are located in countries with systems such as managed floating exchange rate, fixed exchange rate linked to a basket of currencies and also a fixed exchange rate backed by a currency board system. Unlike the freely floating exchange rate system which has never been applied under its purest form, monetary authorities is required by the managed floating rate in order to interfere in foreign exchange markets to prevent the currencies from moving too far from an apparent fundamental value. 2. i. Managed Floating Rate More and more...
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