Chapter 10 Foreign Exchange

Chapter 10 Foreign Exchange - Chapter 10 Foreign Exchange...

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Chapter 10 Foreign Exchange Exchange Rate Types o Free Floating Traded currency in open markets Participants can enter the market and negotiate the best price (reflects accurate market prices) Currency dropping significantly will increase import costs, increasing inflation and reducing country wealth o Pegged Currencies where the issuing government sets a fixed price for the currency Generally small countries that wouldn’t succeed in a floating currency because: Large country currencies could move easily to overwhelm them A history of their own bad governments decisions creates doubt Most peg to the U.S. dollar 2 Panamanian $= $1 U.S. Most don’t hold sufficient currency to support peg rate in central banks Excessive supply or demand forces peg rates to alter o Banded Peg Combines free floating and pegged features Target price for currency with a defined range around the peg Chinese won=largest o Non-Convertible Governments declare it illegal to exchange currency for another
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This note was uploaded on 04/09/2012 for the course GEB 3375 taught by Professor Sweo during the Spring '08 term at University of Central Florida.

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Chapter 10 Foreign Exchange - Chapter 10 Foreign Exchange...

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