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Quotes using a country's home currency as the unit currency (e.g., $1.97656 = £1 in the UK) are known as indirect quotation or quantity quotation and are used in British newspapers and are also common in Australia, New Zealand and the eurozone.
Quotes using a country's home currency as the unit currency (e.g., $1.97656 = £1 in the UK) are known as indirect quotation or quantity quotation and are used in British newspapers and are also common in Australia, New Zealand and the eurozone. The Eurozone (also called Euro Area, Eurosystem or Euroland) refers to the European Union member states that have adopted the euro currency union. ...
- direct quotation: 1 foreign currency unit = x home currency units
- indirect quotation: 1 home currency unit = x foreign currency units
Note that, using direct quotation, if the home currency is strengthening (i.e., appreciating, or becoming more valuable) then the exchange rate number decreases. Conversely if the foreign currency is strengthening, the exchange rate number increases and the home currency is depreciating. Appreciation is a term used in accounting relating to the increase in value of an asset. ... Declining-balance depreciation of a $50,000 asset with $6,500 salvage value over 20 years. ...
When looking at a currency pair such as EUR/USD, many times the first component (EUR in this case) will be called the base currency. The second is called the counter currency. For example : EUR/USD = 1.33866, means EUR is the base and USD the counter, so 1 EUR = 1.33866 USD. A currency pair depicts a quotation of two different currencies. ...
Currency pairs are given with four decimal places, except JPY with two decimal places (EUR/USD : 1.3386 - EUR/JPY : 165.29). In other words, quotes are given with 5 digits. Where rates are below 1, quotes frequently include 5 decimal places. A 1,000 yen note, featuring the portrait of Natsume Soseki. ...
Free or pegged
If a currency is free-floating, its exchange rate is allowed to vary against that of other currencies and is determined by the market forces of supply and demand. Exchange rates for such currencies are likely to change almost constantly as quoted on financial markets, mainly by banks, around the world. A movable or adjustable peg system is a system of fixed exchange rates, but with a provision for the devaluation of a currency. For example, between 1994 and 2005, the Chinese yuan renminbi (RMB) was pegged to the United States dollar at RMB 8.2768 to $1. China was not the only country to do this; from the end of World War II until 1970, Western European countries all maintained fixed exchange rates with the US dollar based on the Bretton Woods system. [2] The exchange rate regime is the way a country manages its currency in respect to foreign currencies and the foreign exchange market. ... For other uses, see Bank (disambiguation). ... ISO 4217 Code CNY User(s) Mainland of the Peoples Republic of China Inflation 1. ... USD redirects here. ... Combatants Allied powers: China France Great Britain Soviet Union United States and others Axis powers: Germany Italy Japan and others Commanders Chiang Kai-shek Charles de Gaulle Winston Churchill Joseph Stalin Franklin Roosevelt Adolf Hitler Benito Mussolini Hideki T�j� Casualties Military dead: 17,000,000 Civilian dead: 33,000... Year 1970 ([[Rf 1970 == January 1 - The Unix epoch begins at 00:00:00 UTC January 2 - The last studio performance of The Beatles oman numerals|MCMLXX]]) was a common year starting on Thursday (link shows full calendar) of the Gregorian calendar. ... Wikipedia does not have an article with this exact name. ...
Nominal and real exchange rates
- The nominal exchange rate e is the price in domestic currency of one unit of a foreign currency.
- The real exchange rate (RER) is defined as
, where P is the domestic price level and P * the foreign price level. P and P * must have the same arbitrary value in some chosen base year. Hence in the base year, RER = e.
The RER is only a theoretical ideal. In practice, there are many foreign currencies and price level values to take into consideration. Correspondingly, the model calculations become increasingly more complex. Furthermore, the model is based on purchasing power parity (PPP), which implies a constant RER. The empirical determination of a constant RER value could never be realised, due to limitations on data collection. PPP would imply that the RER is the rate at which an organization can trade goods and services of one economy (e.g. country) for those of another. For example, if the price of a good increases 10% in the UK, and the Japanese currency simultaneously appreciates 10% against the UK currency, then the price of the good remains constant for someone in Japan. The people in the UK, however, would still have to deal with the 10% increase in domestic prices. It is also worth mentioning that government-enacted tariffs can affect the actual rate of exchange, helping to reduce price pressures. PPP appears to hold only in the long term (3–5 years) when prices eventually correct towards parity.
More recent approaches in modelling the RER employ a set of macroeconomic variables, such as relative productivity and the real interest rate differential.
Interest rate parity
Interest rate parity (IRP) states that an appreciation or depreciation of one currency against another currency might be neutralized by a change in the interest rate differential. If US interest rates exceed Japanese interest rates then the US dollar should depreciate against the Japanese yen by an amount that prevents arbitrage. The future exchange rate is reflected into the forward exchange rate stated today. In our example, the forward exchange rate of the dollar is said to be at a discount because it buys fewer Japanese yen in the forward rate than it does in the spot rate. The yen is said to be at a premium. It has been suggested that this article or section be merged with Spot-future parity. ... In economics and finance, arbitrage is the practice of taking advantage of a price differential between two or more markets: a combination of matching deals are struck that capitalize upon the imbalance, the profit being the difference between the market prices. ... It has been suggested that this article or section be merged with forward contract. ... The spot price of a commodity or a security or a currency is the price that is quoted for settlement (payment and delivery) of the transaction immediately. ...
IRP showed no proof of working after 1990s. Contrary to the theory, currencies with high interest rates characteristically appreciated rather than depreciated on the reward of the containment of inflation and a higher yielding currency.
Balance of payments model
This model holds that a foreign exchange rate must be at its equilibrium level - the rate which produces a stable current account balance. A nation with a trade deficit will experience reduction in its foreign exchange reserves which ultimately lowers (depreciates) the value of its currency. The cheaper currency renders the nation's goods (exports) more affordable in the global market place while making imports more expensive. After an intermediate period, imports are forced down and exports rise, thus stabilizing the trade balance and the currency towards equilibrium. Blue = countries in current account surplus; Red = countries in current account deficit, 2005 The current account of the balance of payments is the sum of the balance of trade (exports less imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as... Balance of trade figures are the sum of the money gained by a given economy by selling exports, minus the cost of buying imports. ... Foreign exchange reserves (also called Forex reserves) in a strict sense are only the foreign currency deposits held by central banks and monetary authorities. ...
Like PPP, the balance of payments model focuses largely on tradable goods and services, ignoring the increasing role of global capital flows. In other words, money is not only chasing goods and services, but to a larger extent, financial assets such as stocks and bonds. Their flows go into the capital account item of the balance of payments, thus, balancing the deficit in the current account. The increase in capital flows has given rise to the asset market model. PPP The purchasing power parity (PPP) theory was developed by Gustav Cassel in 1920. ... The balance of payments is a measure of the payments that flow from one exports and imports of goods, services, and financial capital, as well financial transfers. ... For other uses, see stock (disambiguation). ... Look up bond in Wiktionary, the free dictionary. ...
Asset market model
- See also: Capital asset pricing model
The explosion in trading of financial assets (stocks and bonds) has reshaped the way analysts and traders look at currencies. Economic variables such as economic growth, inflation and productivity are no longer the only drivers of currency movements. The proportion of foreign exchange transactions stemming from cross border-trading of financial assets has dwarfed the extent of currency transactions generated from trading in goods and services. An estimation of the CAPM and the Security Market Line (purple) for the Dow Jones Industrial Average over the last 3 years for monthly data. ... World GDP/capita changed very little for most of human history before the industrial revolution. ...
The asset market approach views currencies as asset prices traded in an efficient financial market. Consequently, currencies are increasingly demonstrating a strong correlation with other markets, particularly equities. Positive linear correlations between 1000 pairs of numbers. ... Ownership equity, commonly known simply as equity, also risk or liable capital, is a financial term for the difference between a companys assets and liabilities -- that is, the value that accrues to the owners (sole proprieter, partners, or shareholders). ...
Like the stock exchange, money can be made or lost on the foreign exchange market by investors and speculators buying and selling at the right times. Currencies can be traded at spot and foreign exchange options markets. The spot market represents current exchange rates, whereas options are derivatives of exchange rates. The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. ... In finance, a foreign exchange option (commonly shortened to just FX option or currency option) is a derivative financial instrument where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. ... Derivatives traders at the Chicago Board of Trade. ...
Fluctuations in exchange rates
A market based exchange rate will change whenever the values of either of the two component currencies change. A currency will tend to become more valuable whenever demand for it is greater than the available supply. It will become less valuable whenever demand is less than available supply (this does not mean people no longer want money, it just means they prefer holding their wealth in some other form, possibly another currency).
Increased demand for a currency is due to either an increased transaction demand for money, or an increased speculative demand for money. The transaction demand for money is highly correlated to the country's level of business activity, gross domestic product (GDP), and employment levels. The more people there are out of work, the less the public as a whole will spend on goods and services. Central banks typically have little difficulty adjusting the available money supply to accommodate changes in the demand for money due to business transactions.
The speculative demand for money is much harder for a central bank to accommodate but they try to do this by adjusting interest rates. An investor may choose to buy a currency if the return (that is the interest rate) is high enough. The higher a country's interest rates, the greater the demand for that currency. It has been argued that currency speculation can undermine real economic growth, in particular since large currency speculators may deliberately create downward pressure on a currency in order to force that central bank to sell their currency to keep it stable (once this happens, the speculator can buy the currency back from the bank at a lower price, close out their position, and thereby take a profit). An interest rate is the price a borrower pays for the use of money he does not own, and the return a lender receives for deferring his consumption, by lending to the borrower. ...
In choosing what type of asset to hold, people are also concerned that the asset will retain its value in the future. Most people will not be interested in a currency if they think it will devalue. A currency will tend to lose value, relative to other currencies, if the country's level of inflation is relatively higher, if the country's level of output is expected to decline, or if a country is troubled by political uncertainty. For example, when Russian President Vladimir Putin dismissed his Government on February 24, 2004, the price of the ruble dropped. When China announced plans for its first manned space mission, synthetic futures on Chinese yuan jumped (since China's currency is officially pegged, synthetic markets have emerged that can behave as if the yuan were floating). President is a title held by many leaders of organizations, companies, trade unions, universities, and countries. ... Vladimir Vladimirovich Putin (Russian: ) (born October 7, 1952) is the current President of the Russian Federation. ... ISO 4217 Code RUB User(s) Russia and self-proclaimed Abkhazia and South Ossetia Inflation 7% Source Rosstat, 2007 Subunit 1/100 kopek (копейка) Symbol руб kopek (копейка) к Plural The language(s) of this currency is of the Slavic languages. ...
Foreign exchange markets
The foreign exchange markets are usually highly liquid as the world's main international banks provide a market around-the-clock. The Bank for International Settlements reported that global foreign exchange market turnover daily averages in April was $650 billion in 1998 (at constant exchange rates) and increased to $1.9 trillion in 2004 (Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity 2004 - Final Results). The biggest foreign exchange trading centre is London, followed by New York and Tokyo. The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. ... The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. ... Market liquidity is a business or economics term that refers to the ability to quickly buy or sell a particular item without causing a significant movement in the price. ... One million million (1,000,000,000,000) is the natural number following 999,999,999,999 and preceding 1,000,000,000,001. ... This article is about the capital of England and the United Kingdom. ... This article is about the state. ... For other uses, see Tokyo (disambiguation). ...
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