Homework in Economic Processes - Assignment Example

The demand for South Korean won will increase with the increase in demand for imports. The supply of South Korean won will reduce due to an increase in its exports. The result will be a shift in the equilibrium value of the South Korean won upwards, thus increasing its value.

The high-interest rates in the US will increase demand for US currency as a result of hot money flows. This will see appreciation in US dollar demand for Argentina pesos will decrease, while its supply will increase. The equilibrium value for the pesos will thus depreciate.

The rise in income levels in the US will increase demand and consumption thus increasing imports. The demand for British pounds will increase, while the supply for British pound for sale will decrease, the equilibrium value of the British pound will increase thus signifying an appreciation in the value of the British pound.

Currency futures are used for hedging by purchasing put options to lock the maximum amount for euros and purchasing call options to set a minimum value for the euros.

In speculating, the speculators who anticipate appreciation of the currency will purchase the future contracts of the currency as opposed to those who anticipate the currency’s decline who will sell currency futures contracts of that currency.

When the US-based firm wants to lock its maximum price to be paid for euros in the future, then the US firm can consider purchasing a call option for euros. Similarly, when the US firm wants the price of its receivables to be locked at minimum prices for the euros, then the US firm can consider putting an option on euros.

A speculator should purchase a call option of the Australian dollar when the Australian dollar is devalued and low compared to domestic currency. Speculators should purchase a put option on the Australian dollar when the value of the Australian dollar is higher than the value of the domestic currency.

Direct intervention refers to the process through which central banks use to control exchange rate in a direct manner Central banks will use direct intervention to change the value of the currency by using currency reserves to buy a particular currency in the market thus placing an upwards pressure on that currency. Sometimes it may increase the supply of that currency in the market thus forcing its prices down (Gandolfo and Gandolfo, 2010).

Indirect intervention refers to the process of central banks working with the banking institutions and encouraging them to operate effectively through capital gains control. The central bank uses indirect intervention to change the value of the currency by influencing the factors that affect exchange rates like demand and supply.