This preview has intentionally blurred sections. Sign up to view the full version.View Full Document
Unformatted text preview: Module 12. Foreign exchange market Learning Goals: Understand the concept of currencies, exchange rates, functions of the market, its sectors and characteristics. How its main exchanges work. Know the theories for determining the exchange rate and foreign exchange strategies. Context: You must imagine that you work for a multinational company, which makes sales as well as carrying out investment projects in different countries. You must be able to define the most appropriate strategies for the needs of the company, in order to properly manage exchange rate risk. Overview: ¡ Concepts ¡ Functions and characteristics ¡ Main exchanges ¡ Organisation of the market ¡ Exchange rates ¡ Sections of the market ¡ Theories for determining the exchange rate ¡ Foreign exchange strategies Continuous assessment: No assignment Concepts Exchange rates are an important piece of information that shapes international transactions in goods, capital and services. The relationship between almost all the most widely ‐ used currency are published daily, showing the exchange rates, although there is almost always a more important currency that is used as a benchmark to measure the value of the others. The U.S. dollar serves this role almost everywhere in the world. The exchange rate between convertible currencies is determined by worldwide supply and demand for it. In principle, these vary according to the balance of payments ‐ in other words, as a result of international trade flows: a shortfall means that a country has an excess of their national currency compared to other currencies, making that their value increases and that the national currency is devaluated; a surplus will produce the opposite effect, a rise. After devaluation the goods that the country exports become cheaper: their price, measured in national currency will be lower, stimulating exports. The opposite would happen with imports: devaluation would make them more expensive, producing a reduction of imported goods. The result of both processes contributes to eliminating the balance of payments deficit, thus restoring the equilibrium in the nation's accounts. When one currency is exchanged for another an exchange rate is used. In other words, the exchange rate is the price of a currency in terms of another monetary unit. What do we understand by currencies? ¡ Foreign currencies: legal tender and any means of payment denominated in a currency other than the national or domestic currency. What do we understand by convertible currency? ¡ Convertible currency: A currency whose price is determined by the market, since there is free exchange for another currency. What is the foreign exchange market? ¡ The system or structure by which currencies from different countries are bought and sold....
View Full Document
This note was uploaded on 02/03/2011 for the course ECON 101 taught by Professor Flora during the Spring '11 term at Universidad Carlos III de Madrid.
- Spring '11