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(PDF) Foreign-exchange trading risk management

   

Added on  2021-04-24

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RUNNING HEAD: Foreign Exchange- Research and Trading ReportForeign Exchange- Research and Trading Report
(PDF) Foreign-exchange trading risk management_1

Foreign Exchange- Research and Trading Report 1ContentsIntroduction......................................................................................................................................2Factors having greatest influence on the value of Exchange Rates.................................................2Supply and Demand.....................................................................................................................2Inflation and Deflation.................................................................................................................3Interest Rates and Money Supply Policy.....................................................................................3Balance of Payments....................................................................................................................4Asset Prices..................................................................................................................................5Politics and Wars.........................................................................................................................5Management of Value of CNY by PBOC and Future Direction of PBOC Policy..........................6Conclusion.......................................................................................................................................8References......................................................................................................................................10
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Foreign Exchange- Research and Trading Report 2IntroductionForeign Exchange rate can be defined as the rate at which the currency of one country may be transformed into the currency of another country (Moosa & Bhatti, 2010). It is considered as one of the most important means which assists in determining the relative level of the economic health of a country. The foreign exchange rate provides a window to the economic stability of a country. The fluctuations in exchange rates re caused daily with the changes in market forces of demand and supply of the currencies from one county to another.This report focuses on the factors that have an influence on the value of exchange rate such as the supply and demand, inflation and deflation, interest rates and money supply policy, balance of payments, asset prices and politics and war (Block, Hirt & Danielsen, 2011). This report also discusses the management of the value of Chinese Yuan (CNY) by Peoples Bank of China (PBOC) along with the opinion regarding the future direction of PBOC policy. Factors having greatest influence on the value of Exchange RatesFollowing are the factors that have the greatest influence on the value of exchange rates.Supply and DemandThe forces of demand and supply have a great influence on the determination of exchange rates (Levi, 2009). The value of a currency is expected to increase when there is high demand for that currency in comparison with the currency for which there is less demand (Gabaix & Maggiori, 2015). The value of a currency is declined in comparison with other currency when the holders of such currency have a desire of disposing it in exchange for other currencies. The detection of opportunity in a particular currency by the market participants, either for higher investment returns or direct appreciation, results in the increase in demand for that currency (Corsetti & Lloyd, 2016). This in turn will lead to currency appreciation as the purchasers will outbid on another. When such an opportunity is moved to another currency/ country, first currency holders sell their currency for obtaining the currency associated with new opportunity. The fall and rise of the exchange rate depend on the basic economic conditions that prompt investors, traders and others to obtain more of a specific currency (Metcalf, 2018).
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Foreign Exchange- Research and Trading Report 3For example, in 1971, there was upward float in the exchange rate and then a downwards float against all the foremost currencies until the year 1976. One of the main reason behind this depreciation was a rapid demand expansion in the UK.Inflation and DeflationInflation can be defined as the rate at which there is an increase in the general level of prices of goods and services (Hart, 2009). The variations in the inflation rate have short term and long term implications for the foreign exchange market. The value of the currency increases with the fall in inflation rate of a country. Lower inflation also results in slower rate of increase in the prices of goods and services. Rising currency value is exhibited by the country having a consistent lower inflation rate whereas depreciation in the currency is witnessed by the country with higher inflation rate (Weale, Blake, Christodoulakis, Meade & Vines, 2015). In other words, cost of production is increased due to inflation which subsequently results in the increase in prices for goods which in turn leads to less competitive exports. This further leads to fall in exports thereby weakening the domestic currency. High signs of inflation have the capability of bringing an increase in the domestic currency due to the anticipation of traders regarding the possibility of slowing down of inflation by increasing interest rates attempted by the local centralbank. Deflation, on the other hand, is considered as the symbol of economic depression and is complemented by a weaker currency and lower interest rates (Frenkel & Johnson, 2013). For example, UK suffered from the peak of inflation in the late 1970s and early 1980s. For a very long time, the value of pound has been weak in comparison with dollar which is depreciating since the preceding 116 years by an annual rate of 1 percent. This depreciation is considered to be a result of the higher inflation rate in Britain which resulted in degrading the purchasing power of the pound by a minuscule 0.22 percent every year.Interest Rates and Money Supply PolicyThe official monitory policy of a country sets the interest rates which have a great influence on the exchange rates (Bodenstein, Erceg & Guerrieri, 2017). The level of economic activity is influenced by the Central banks along with the influencing the behavior of lenders and borrowersin their currency by fluctuating the interest rates. The rate of foreign exchange, inflation and interest rates are correlated. The dollar exchange rate and currency value is affected as a result ofchanges in interest rates. Appreciation in the currency of a country is witnessed when there is an
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