IBM Forex Mkt 7th Module(2)

8/11/2019 IBM Forex Mkt 7th Module(2)

1/52

MODULE-7

Foreign

xchange

Market


2/52

The foreign exchange market (forex, FX, or

currency market) is a form of exchange for theglobal decentralized trading of internationalcurrencies. Financial centers around the worldfunction as anchors of trading between a widerange of different types of buyers and sellersaround the clock, with the exception ofweekends. The foreign exchange marketdetermines the relative values of differentcurrencies.[

The foreign exchange market assistsinternational trade and investment by enabling

currency conversion.


3/52

For example, it permits a business in the United States toimport goods from the European Union member states

especially Euro zone members and pay Euros, eventhough its income is in United States dollars.

It also supports direct speculation in the value ofcurrencies, and the carry trade, speculation based on the

interest rate differential between two currencies. In a typical foreign exchange transaction, a party

purchases a quantity of one currency by paying aquantity of another currency.

The foreign exchange market is unique because of

Its huge trading volume representing the largest assetclass in the world leading to high liquidity;

Its geographical dispersion;


4/52

Its continuous operation: 24 hours a day except

weekends, i.e. trading from 20:15 GMT onSunday until 22:00 GMT Friday;

The variety of factors that affect exchange rates;

The low margins of relative profit compared

with other markets of fixed income; and

The use of leverage to enhance profit and loss

margins and with respect to account size.

As such, it has been referred to as the market

closest to the ideal of perfect competition,

notwithstanding currency intervention by

central banks.


5/52

Functions of Foreign Currency

Exchange Markets

The foreign currency exchange markets are wheremoney from different countries are bought and sold.

The focus of foreign currency exchange is thefacilitation of international commerce.

Foreign currency exchange markets can also functionas a method of making investments, can be used bygovernments to impact the value of their currencyand can help companies reduce losses due to changesin exchange rates.


6/52

Primary Function

The primary function of foreign currency exchangemarkets is to convert the currency of one country intoanother currency.

For example, the U.S. dollar may be changed intoMexican Pesos or English Pounds.

The amount of currency converted depends on theexchange rate, which can be fixed or can fluctuate.

The U.S. dollar is a currency that has a fluctuatingexchange rate that is based on market demand. Somecountries, like China, have a fixed exchange ratedetermined by their central bank.


7/52

International Transactions

Foreign currency exchange markets serve tofacilitate international financial transactions.

These transactions may be the purchasing andselling of goods, direct investment in buildingsand equipment in a foreign country or the

purchase of investment vehicles like foreignbonds.

For example, a U.S.-based company may want topurchase goods manufactured in China. The

foreign currency exchange market allows themto exchange U.S. dollars and make the purchasein Chinese RMB (renminbi, the currency of thePeople's Republic of China).


8/52

Currency Value

The value of a country's currency can influenceinternational trade, consumers' purchasing power andinflation.

Central banks of a county or region, like the U.S. FederalReserve, seek to minimize the impact of currencyfluctuations. The foreign currency exchange marketfunctions as a tool for central banks to control the value oftheir currency by buying or selling currency, whichinfluences the total amount in worldwide circulation.

Investment

Fund managers and investment professionals use theforeign currency exchange market to help diversify theirportfolios and potentially increase their returns.

Through calculated risks, investors can bet on a change inthe price or exchange rate of a currency. Just like with thestocks, if currency is purchased at a low price and sold at ahigher price, the investor makes money.


9/52

Loss Protection

International companies that work in multiple countries

are subject to gains and losses based on exchange ratefluctuations.

To help prevent losses, companies can make forwardtransactions where they make a binding agreement toexchange currency for another currency at a fixed rate.

This function of the foreign currency exchange markethelps a company minimize the risk of foreign exchange onfuture expenses.

For example, if a U.S.-based company places an order witha firm in Taiwan that will be ready in five months, the

company can enter a forward transaction agreement thatfixes the price based on the current exchange rate at thetime of order. The company knows the value and cost ofthe purchase and will not be hit with a future loss basedon a change in exchange rates.


10/52

Nature Of The Foreign Exchange

Market

This currency exchange market is an over-the-counter (OTC) market, meaning there is nocentral exchange and clearing house whereorders are matched. With various levels of

access, currencies are traded in various marketmakers:

The Inter-bank Market Large commercialbanks do business with each other through the

Electronic Brokerage System (EBS). Banks canmake their quotes available in the forex marketonly to those banks that they trade. This marketisntdirectly accessible to retail traders.


11/52

The Online Market Maker Retail traders canaccess the FX market through online market

makers that trade primarily from the US and theUK. These market makers routinely have arelationship with several banks on EBS; thegreater the trading volume of the market maker,the greater relationships it likely has.

Market Hours: Forex is really a market thattrades actively so long as there are banks openwithin the major financial centers around theglobe. This is effectively from the beginning of

Monday morning in Tokyo before the afternoonof Friday in Ny. In terms of GMT, the tradingweek is carried out in Sunday night until Fridaynight, or roughly Five days, 24 hours per day.


12/52

Perpetual motion in prices : One of the othercharacteristics of the foreign exchange is that thefluctuations in the exchange rate will cause onecurrency to lose its monetary value, while others togain.

So there is a continuous motion in prices. In theforeign exchange market, the exchange rate refers to

the exchange ratio between the currencies of twocountries. Fluctuations in the exchange rate changewill cause one currency to lose its monetary value,and at the same time increase the monetary value ofanother currency.

Unlimited Potential for Profit and Loss: The mosteffective manner to illustrate the "unlimitedness" ofthe market environment is to compare it to gambling.

With any gambling game you will always know exactlyhow much you can win or lose each time you play.


13/52

You decide exactly how much you want to wager, youknow exactly how much you can win as well as lose, andyou may even know the mathematical odds of either

possibility. This is not the case in market environment. In any particular trade you never really know how far

prices will travel from any given point. If you never reallyknow where the market may stop, it is very easy tobelieve there are no limits to how much you can make on

any given trade. Several psychological factors go into assessing the

market's potential accurately for the price movement inany given direction. The possibility for unlimited profitsmay in fact exist, but how realistic it is in any given trade

is another matter. Going through the comprehensive guide on studying the

nature of foreign exchange above will surely help youunderstand the market psychology.


14/52

TRADING MECHANISM

How much money is required for Forex trading? Inorder to find out, it is necessary to study themechanisms of making a deal.

First, when a trader buys a currency, he doesnt buy

Euros or British pounds, he buys a currency pair, e.g.euro-dollar (written like this: EURUSD). This meansthat we are buying Euros for dollars.

The currency which is written first is called the Basecurrency; the currency which is written second is

called the Quote currency. And a trader doesnt buy the amount directly; the

forex trading is done by lots. One lot represents100,000 units of a base currency.


15/52

How many dollars should we be paying for it?

There is a notion of currency pair exchangeratewhich is a monetary denomination of thecost of a currency pair, to be more exact, a unitof base currency expressed in quote currency.

And when we say that a euro/dollar costs1.3875, it actually means that for 1 euro we mayget 1 dollar and almost 39 cents.

To buy one full lot of such a currency pair we

need to pay 100,000 * 1.3875 = $ 138,750 onForex trading market.

Obviously, very few people have this kind ofmoney. And this is why traders have lately beenworking on a marginal basis.


16/52

A margin is a deposit. When a bank opens a position for a trader, thebank is actually paying for the entire lot, and the trader gives thebank a deposit 100 times lower, i.e. the leverage mechanism is

applied. Usually the leverage is 1:100 on forex trading market. Accordingly,

the Forex trading deposit in this example will be $ 1,387.50. Whena forex trading position is closed, the deposit is returned to thetrader in full, regardless of the result.

Because of this, in order for a trader to make a deal, he needs acertain sum of money for a forex trading deposit, and his accountshould have some extra money as a so-called safetynet.

Usually, the deposit sum for various currency pairs is shown in theContract Specification Table. For example, in forex trading for thecurrency pair British pound/dollar (denominated as GBPUSD) to

make a deal in 1 lot with the leverage 1:100, the deposit will be1,000 GBP which is about $ 2,000, and for the currency pair NewZealand dollar/US dollar (denominated as NZDUSD), 1,000 NZD, i.e.about $ 600. For all other currency pairs the deposit will be almostthe same, i.e. the deposit will almost never exceed $ 2,000.


17/52

Thus, an important piece of advice for

traders: The minimum sum required to trade in one

lot should be about $ 2,000-2,500, and the

greater the sum, the more relaxed and safe

the forex trading is.

No matter what, before opening a forex

trading position, the trader should first

analyze the market to find a profitable

situation where money can be earned.


18/52

What Currencies can be Traded at Forex Trading

Dealers in most companies work mainly in US dollars, and

very rarely in any other world leading or national currency. It is essential to understand one very important thing: if

your forex trading account is in dollars, it doesntmean thatyou can only make deals when a currency is being boughtfor dollars.

It may seem paradoxical, but you may buy dollars for someother currency which you, naturally, dont have in yourdollar forex trading account. For example, you may buydollars for Euros. Such deals are made when the euro rate isexpected to fall to the dollar and is called buy dollar

against euro. You may even make a deal where the dollar isnot present at all, e.g. buy Japanese yen against Swissfrancs. Y

our forex trading account is debited in dollars in an amountequivalent to the cost of the deal, and the currency is

automatically converted at the current exchange rate.


19/52

Most of the worlds currency market is made up of thefollowing currencies:

US dollarUSD;EuroEUR;British pound of sterlingGBP;Japanese yenJPY;Swiss francCHF.

These currencies are the most popular for Forex tradingmarket.

We have already stated that when the trader buys acurrency, he does not buy Euros or British pounds, but a

currency pair, e.g. euro-dollar (EURUSD), which means thathe buys Euros for dollars.

In this example, the euro is the base currency and the dollaris the quote currency. We say buy euro-dollar, sell euro-dollar. The most popular currency pairs are in forex trading:

EURUSD, GBPUSD, USDCHF and USDJPY.


20/52

Position - Opening and Closing

Making a deal on the Forex trading market is

usually called, openinga position. Subsequently, instead of saying, Im buying

Euros one should say, Im opening a positionin Euros. If the other currency is not identified,

it means that its a euro-dollar currency pair(EURUSD), i.e. Euros are bought for US dollars.Depending on whether you are buying or selling,the positions are called long (bull) or

short(bear)on the Forex trading market. So in our case, we should say, Im opening a

long position in Euros.


21/52

Here is an example of how Forex trading works. Letsassume that the euro will grow in value, i.e. the pricewill go up and we open a long position buy Euros. Ifwe expect the euro to fall to the dollar, we sell theeuro, i.e. open a short position.

With regard to Forex trading in currencies for which thebase currency is the US dollar, e.g. in a pair dollar-Swiss

franc (USDCHF), the situation is a little different. If we believe that the Swiss franc will grow to the US

dollar, then the price will go down as opposed in thesituation with the euro. In this case, we open a shortposition for the USDCHF currency pair.

Remember the rule that applies to any currency pair: ifwe expect the price to go up we buy (open a longposition), if we expect the price to go down we sell(open a short position) on the Forex trading market.


22/52

Along with the concept of opening a position,there is the opposite concept on the Forex

trading, closinga position. It means making a deal opposite to the deal

we made when opening the position.

If earlier we bought Euros for dollars, nowwe sell Euros for dollars; if we sold Britishpounds for Swiss francs, now we buy themfor Swiss francs.

Proceeds from the deal will hit our account,with gains flowing into our account andlosses flowing out.


23/52

Ask and Bid

There is another way to monetarily express a

currency pair, besides the rate of a currency pair:a quote. This is the information on the currentrate of a currency pair expressed in two figures -Bid and Ask.

Ask is the greater price of a quote. The tradercan buy at this price.Bid is the lower price of the quote. The tradercan sell at this price.

Letstake for example the currency pair USDCHF1.1350/1.1353. It means that you can buy 1dollar for 1.1350 Swiss francs. Thus, you may sell1 dollar for 1.1353 Swiss francs on the Forextrading market.


24/52

Spreads

The difference between bid and ask is called

the bid-ask spread. The spreads in the Forextrading market are very small.

For most currency pairs, the spread is from 2

to 4 points, which is much smaller even thanspreads of the better performing, liquidsecurities on other markets.

Spread is a hidden, integral cost of the

forex trading, and it is minimal for thecurrency market. New technologies havemade these low prices available to just abouteverybody.


25/52

Points

Point (Pip - price interest point) is the

minimum price fluctuation in the cost of acurrency pair.

For the majority of currencies the currencyrate is calculated up to a fourth of a decimalfigure.

Thus, 1 point is 1/10 000 or 0.0001 of thequote currency. Change in 1 point for

GPB/USD at 1.7519 leads to a price of 1.7520.The point value for some currency rates, suchas USD/JPY, is calculated only up to thesecond decimal figure (i.e. 1/100 or 0.01).


26/52

Calculation of Profit and Loss

The majority of Forex trading platforms automatically

calculate the traders profit and loss for openpositions. This helps the trader to track profit and losssimultaneously as the market prices constantlychange. However, the trader should know how suchcalculations are made.

Examples:

Sell 5 lots EUR/USD at price 1.4625 and buy them atprice 1.4570:

In this example the client gets 55 points 5 lots = 275points of overall profit (as the trader sells them at ahigher price than he bought them). The cost of everypoint for pair EUR/USD is $ 10. Thus, the final profit is275 points x $ 10 = $ 2,750 in forex trading.


27/52

Buy 3 lots USD/JPY at price 102.10 and sell them at price101.80:

In this example the client gets 30 points 3 lots = 90

points of overall losses (as the client sells at a lower pricethan he bought them). The cost of every point for pairUSD/JPY is 1000 JPY which in dollars represents 1,000:101.80 (USD/JPY rate at the time of position closing) =about $9.82. Thus, the final loss of the client is 90 points x

$9.82 = $883.80 in forex trading. Sell 2 lots EUR/GBP at price 0.8154 and buy them at price

0.7802:

In this example the client gets 352 points 2 lots = 704points of overall profit. The cost of every point for pair

EUR/GBP is 10 GBP which in dollars is 10 x 1.73 (letsassume that GBP/USD rate at the time of position closingis 1.7300) = $ 17.30. Thus, the final profit is 704 points x $17.30 = $12,179.20 in forex trading.


28/52

Forex trading systems

Various companies and dealers offering services on the

Forex market use various trading platforms (systems),but the most popular is the MetaTrader program.

(Other trading systems may differ not only in theinterface but also in their ideology, terminology, etc.)Therefore, any actions regarding deals on the Forex

market place will be evaluated through examples fromMetaTrader.

The program has a multilingual interface. When firstlaunching the program, it will ask you to register a newtrading account.

Every dealer has its own particular registration, soanswers to potential questions which may arise duringregistration can be found on your dealersweb site. TheMetaTrader trading system has a simple, standardized

interface.


29/52


30/52

You can easily set it up on your own. The main

thing to learn is how to open and close

positions, also known as orders.

major part of the window is taken up by theprice chart. You may switch between different

charts by choosing the necessary currency or the

chart type. To open a position, either click NewOrderor the F9 key on the keyboard.

A dialogue window will open in which you can

enter the dealsparameters.


31/52


32/52

The Symbol parameter lets you choose the currency pair for theposition you are opening.Lets review the Amountparameter in greater detail. The amount ofthe deal is set in lots. Usually 1 lot is 100,000 units of one of the

currencies, although this may differ from one dealer to another. Whenmaking a deal we indicate how many lots of currency we want to buy orsell. For example, if you set 1, it means that you make a deal in 100,000currency units. For Euros at the rate of, say, 1.3100 and the leverage of1:100 to make a deal you need 100,000:100 * 1.3100 = 1,310 US dollars.

Choose the type of order Immediate Execution. Buttons Sell and

Buy in MetaTrader open short and long positions accordingly. Clickone of these buttons, wait a few seconds, and thats it. The deal hasbeen made.

Once the rate enters into a profitable area, the position may be closed.In order to close it, right click on the line with the order information andchoose Close Order in the dropdown menu. The same window willopen as before, but the button Closewill be accessible. Click it, wait afew seconds, and the order is closed. In the line below the chart you willsee the status of the account.

It is highly recommended to open a virtual account and to practice withthese purely technical procedures to better understand how positionsare opened and closed. This is the essence of trading on theinternational currency marketplace.


33/52

Fundamental analysis

How Economic News Affect the Currency Rate

Lets consider the effect of economic news on the currencyrate by looking at an example from January 22, 2008. Letsassume that you have prepared for a deal and plan on buyingEuros, and you know that today major interest rate changeswill be announced by the European Central Bank (ECB).

The market has been awash with rumors and speculationthat the rate may be reduced due to a slowdown ofeconomic growth around the euro, and that assets in Eurosmay become less attractive for investors.

That is why the euro has been falling to the dollar. But whenthe decision is published, it turns out that the interest rateremains at the former rate of 4%, the market sighs withrelief, and the rate shoots up. The traders optimism isreinforced at the press conference by Jean-Claude Trichet,the ECB Head, where he says that the ECB will undertaketimely measures to keep the eurosrate stable.


34/52


35/52

On this chart you can see that the euro shot up at thetime of the news, and within 5 hours the price of theeuro/dollar currency pair changed by 170 points.

The cost of one point in euro/dollar currency pair is10$, hence, in 5 hours 1700$ could have been earned.This is how a trader may use the fundamental

analysis in forex trading. But thatsnot all. Now we will consider an example of

the so-called short-term position, where your deallasts but a few hours. The duration of a trade

operation may last a few days, or even a few weeks. And here you also use the fundamental analysis to

forecast the ratesfluctuations.


36/52

How Political News Affect the

Currency Rate

Now lets consider an example of a political event thataffected the Forex market.

You will surely remember the scandal in the fall of 1998whose central figures were the US President Bill Clintonand Monica Lewinsky.

For a long time, Clinton failed to admit his relationswith Lewinsky, but in late August of 1998, there was acourt hearing when the President officially confirmedthat Lewinsky was his lover.

It shocked the American society and Clinton was underthe threat of impeachment.In that autumn, the dollar dropped substantially inrelation to other currencies. For instance, the dollar lost890 points to the Swiss franc in just two weeks.


37/52

EXCHANGE RATE DETERMINATION

Having endeavored to forecast exchange

rates for more than half a century, I have

understandably developed significant humility

about my ability in this area

- Alan Greenspan


38/52


39/52

I Short-Run Forecasting Tools

Short-term changes in exchange rates are the most

difficult to predict and are often determined based onbandwagon effects, overreaction to news,speculation, and technical analysis.

Trend-Following Behavior is the tendency for themarket to follow a trend. In other words an increasein the exchange rate is more likely to be followed byanother increase.

Investor Sentiment is based on the consensus of themarket. For example if the market is bullish on thedollar, then the dollar is likely to strengthen versusother currencies.


40/52

Investor Sentiment is based on the consensus of themarket. For example if the market is bullish on thedollar, then the dollar is likely to strengthen versusother currencies.

The FX market is quite different from the world equitymarkets in one important aspect: transparency. Inequity markets, rules ensure that volume and price

data are readily available to all parties this is NOTthe case in FX markets. In fact large FX dealers areable to observe factors such as: shifts in risk appetite,liquidity needs, hedging demands, and institutionalrebalancing.

Order Flow - there is evidence of a positivecorrelation between spot exchange rate movementsand order flows in the inter-dealer market and withmovements in customer order flows.


41/52

II. Long-Run Forecasting Tools

Purchasing Power Parity (PPP)states that

since the prices should be the same acrosscountries, the exchange rate between twocountries should be the ratio of the prices in

each country.

Relative PPPstates that the exchange rate willchange to offset differences in national

interest rates. In other words, if Country A has

higherinflation than Country B, you canexpect Country As currency to depreciateversus Country Bs currency.


42/52

Structural Changes three structural changes can affectlong-term trends in exchange rates: 1) an increase ininvestment spending, 2) fiscal stimulus, 3) a decline inprivate savings. It is the net impact of structural changesthat determines if the countryscurrency will rise or fall.

Investment spendingdomestic investment in a countrywill help to strengthena countryscurrency. For example,the United States experienced an investment boom in the1990s.

Fiscal stimulusgovernment investment in a country canalso help strengthen a countrys currency. For example,Turkey has enjoyed fiscal stimulus and governmentspending in recent years.

Private savings the citizens of a countrys tendency tosave will help strengthen a countrys currency. Forexample, Japan has had a large and persistent current-account surplus that has led to a stronger currency.


43/52

Terms of Trade is the idea that the price of agood that trades in international markets will

have an impact of the associated countryscurrency.

This can work in terms of both imports andexports.

For example, in countries where commoditiesmake up a large portion of GDP, like Australia,Canada, and New Zealand, there is a strongpositive relationship between the price ofcommodities and the strength of the associatedcountryscurrency.

On the other hand, in Europe, the higher pricesfor oil, have led to a weaker currency.


44/52

III. Medium-Run Forecasting Tools

International Parity Conditions the key

international parity conditions are 1) purchasingpower parity, 2) covered interest-rate parity, 3)uncovered interest-rate parity, 4) the Fishereffect, and 5) forward exchange rates.

Current Account Trends Countries that runpersistent current-account surpluses will seetheir currencies appreciate over time. Currentaccount imbalances are driven by structuralchanges in international competitiveness,changes in the terms of trade, and long-termshifts in national savings-investment


45/52

Capital Flows foreign demand for a

countryscurrency will lead to an increase inthe value of the domestic currency. Capital

flows can come from foreign direct

investment (FDI), a flight to quality, perceived

strength, or the existence of investment

opportunities.

Monetary Policy expansionary monetary

policy will lead to a depreciation of thedomestic currency, because lower interest

rates will generate an outflow of capital


46/52

Fiscal Policy an expansionary fiscal policy raisesdomestic interest rates and increases domesticeconomic activity.

Economic Growthin the short run if the economy isgrowing stronger relative to other economies theincreases in economic activity that create attractiveinvestment opportunities will strengthen thecurrency.

Central Bank Intervention central banks oftenparticipate in foreign exchange markets the argumentmost often made to justify intervention is that theexchange rate is simply too important a price to be

left to the market. The assumption is that centralbank authorities can do a better job in the markets interms of driving exchange rates toward their long-term equilibrium values.


47/52

Balance of trade

The balance of trade (or net exports, sometimes

symbolized as NX) is the difference between themonetary value of exports and imports ofoutput in an economy over a certain period. It isthe relationship between a nation's imports and

exports.

A positive balance is known as a trade surplus ifit consists of exporting more than is imported; anegative balance is referred to as a trade deficitor, informally, a trade gap.

The balance of trade is sometimes divided into agoods and a services balance.


48/52

The balance of trade forms part of the current account, whichincludes other transactions such as income from theinternational investment position as well as international aid.

If the current account is in surplus, the country's netinternational asset position increases correspondingly. Equally,a deficit decreases the net international asset position.

Measuring the balance of trade can be problematic because ofproblems with recording and collecting data.

As an illustration of this problem, when official data for all theworld's countries are added up, exports exceed imports byalmost 1%; it appears the world is running a positive balanceof trade with itself. This cannot be true, because alltransactions involve an equal credit or debit in the account of

each nation. The discrepancy is widely believed to be explained by

transactions intended to launder money or evade taxes,smuggling and other visibility problems. However, especiallyfor developed countries, accuracy is likely.


49/52

Factors that can affect the balance of trade include:

The cost of production (land, labor, capital, taxes,incentives, etc.) in the exporting economy vis--vis

those in the importing economy; The cost and availability of raw materials,

intermediate goods and other inputs;

Exchange rate movements;

Multilateral, bilateral and unilateral taxes orrestrictions on trade;

Non-tariff barriers such as environmental, health orsafety standards;

The availability of adequate foreign exchange withwhich to pay for imports; and

Prices of goods manufactured at home (influenced bythe responsiveness of supply)


50/52

Exchange Rate Stability

Methods

Countries, especially developing ones, pursuestable exchange rates to attract foreign capital.

They usually accomplish this by fixing theircurrencies to that of a more stable country, a

practice called pegging. A country's central bank may increase or decrease

the money supply to maintain this rate.

Many countries have their currencies pegged to

the U.S. dollar, but some such as China andKuwait have dropped the connection in recentyears as the dollar has lost strength.


51/52

Theories/Speculation

Stable exchange rates generally are viewed as favorable, butthere can be drawbacks.

An economics principle called the Mundell-FlemmingTrilemma states that countries have three economic goals: (1)stable exchange rates, (2) free movement of capital and (3)independent money supply.

The Trilemma states that it is only possible to have two ofthese goals at the same time.

Warning

Preoccupation with exchange rate stability can exacerbateother economic problems. In the late 1990s, Argentina had

inflation problems that could have been eased if thegovernment had adjusted the money supply. But this strategywas not pursued partly because of concerns about exchangerate stability.


52/52

Currency Convertibility

Definition of 'Currency Convertibility:

The ease with which a country's currency can beconverted into gold or another currency. Convertibilityis extremely important for international commerce.

When a currency in inconvertible, it poses a risk andbarrier to trade with foreigners who have no need for

the domestic currency. Government restrictions can often result in a currency

with a low convertibility. For example, a governmentwith low reserves of hard foreign currency oftenrestrict currency convertibility because the governmentwould not be in a position to intervene in the foreignexchange market (i.e. revalue, devalue) to support theirown currency if and when necessary.

Date post:	02-Jun-2018
Category:	Documents
Upload:	noorain-firdouse
View:	223 times
Download:	0 times

IBM Forex Mkt 7th Module(2)

Documents