Extract of sample "Assessing and Understanding the Foreign Exchange Market"
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(Investopedia) Chinese foreign exchange market plays an important role in the development of its economy. It is an important source of investment and income in China. The Chinese foreign exchange market mainly deals in Chinese RMB Renminbi Yuan. The basic function of Chinese foreign exchange market is to conversion the currencies. For example in this market the U.S. dollars can be converted into Chinese RMB. Another important function of Chinese currency market is that it facilitates international business transactions of China through the conversion of currencies. (Laura Acevedo) An important tool for stable economic growth is currency value and this market helps the central bank in controlling the value of its currency through buying and selling. It is also a productive source of investment for the investors in China because if they a currency at a lower rate and due to fluctuations in currency rate they are able to sell it at a higher rate than this sure is a profitable investment. (Maps of World) Spot rate is the price that a buyer is ready to pay for buying a currency in terms of another currency. Chinese spot exchange rates are determined by the central bank. This determination by the central bank is based on a number of factors which include the buying and selling of Yuan in different exchange markets, the value of Yuan in term of other currencies- as this value keeps on changing the spot rate of Chinese exchange market also changes simultaneously. These rates are very important in the Chinese currency market as they are the current exchange rate on the basis of which the day to day transactions of the Chinese stock market take place. And without these rates no business is possible in this market. (Investopedia) Forward exchange rate is the rate at which a currency can be traded for one currency at a particular time in future. This time ranges between two days to twelve months. China puts forward exchange rate reforms when necessary in order to maintain its social and economic stability. Forward exchange rate plays an important role in insuring foreign exchange risks because when a country enters in a transaction through forward exchange rate and in the meantime the exchange rates fall badly then the forward exchange rate act as insurance against unprofitable dealings. (Ozforex) One of the most important theories used for the determination of currency exchange rate is purchasing power parity theory (PPP). It is an economic theory that calculates the changes that are to be made in the currencies of two countries in order to make the difference between their exchange rates and their purchasing power equal. Mathematically this theory is represented as follows: S=P1/P2 Here “s” is the exchange rate between the two currencies. “P1” is the price of good x in country one and “P2” is the price of good x in country two. This theory can be elaborated by an example that if a cold drink costs 1.50 Yuan in china than it should be worth 1.00 us dollars if the exchange rate between U.S.A and china is 1.50 USD/RMB. This theory helps the economists in determining the standard of living in different countries. (Investopedia) It is possible that a currency may be devalued but the standards of living may remain high due the higher purchasing power of the people. Most of the economists prefer purchasing parity concept in the calculation of GDP as countries like china intentionally understate their currency value which results in the understatement of GDP. Therefore mostly the GDP of different countries is calculated through purchasing parity approach. This theory also helps in the correction of trade
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It has traditionally performed the role of converting one currency into another (Madura, 2009). It is consistent with the principles of market economy laid down by Adam Smith, according to which the value or price of a currency is determined by the market forces of demand and supply.
The US treasury was one of the driving forces behind the rise or decline of the yield curve in 2000. The timing of the market can thus be assessed by the yield curve as to whether it will yield profit or loss in the share market. The Yield curve as discussed above has various securities with different holding period return.
The Bretton Woods agreement was developed in New Hampshire in 1944. The major outcomes of the agreement were the formation of an International Monetary fund. The system proposed the introduction of a pegged foreign monetary exchange rate system that was adjustable.
John Sloman (1999)
Individuals participate in the foreign exchange market for a number of reasons. On the demand side, one principle desire for foreign currency is to purchase goods and services from another country or to send a gift or investment income payments abroad.
So foreign exchange markets deals with each nation's currency. Its value then depends on how the selling and buying activities of the said currency. Say for example, peso has a lower value than dollar. The value of peso depends on how much dollars have been exchanged into peso.
No doubt, our reading of the latest literature leads us to terminate that, in difference by the profession's consensus scrutiny of the 1980s, official intervention can be effectual, particularly from side to side its role as a signal of policy intentions, and particularly when it is publicly proclaim and concerted.
According to the research findings, the foreign exchange market is a decentralized interaction between buyers and sellers of currencies that determines the relative worth of currencies. It would be impossible to have foreign trade and investment without the existence of such markets that facilitate the conversion of one currency into another.
This recession became a recipe for the 1992 UK crisis. Before joining the ERM, UK should have considered domestic interest rates and their relationship to inflationary pressures in the economy. In essence, preventing the ERM would have required
Sometimes anticipatory buying of the foreign currency drives the market. Anticipation can destabilise Foreign Exchange Markets. This is because the participants tend exchange their national currency more or less depending on the expected exchange rates.
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