5014 - Finance of International Trade - Exchange Rate Regimes/Systems p38-46

Question 1

What is an exchange rate regime?

Answer 1

A description of conditions under which national governments allow exchange rates to be determined

Question 2

Fixed Exchange Regimes

Answer 2

National governments can agree to maintain the convertibility of their currency at a fixed exchange rate. For Example:

• Bretton woods agreement 1944 pegged £1 to equal $2.80 between 1949-67
• Saudi Arabia and the US have an agreement that $1 = SR 3.75

Question 3

Semi Pegged Regimes

Answer 3

Floating but with government intervention

Question 4

Pure Floating Regimes

Answer 4

Exchange rates based on supply an

demand allowing currencies to attain their free market equilibrium without government intervention

Question 5

Dirty Floating Regimes

Answer 5

Intervention is used to offset speculative movements but is allowed to gradually find equilibrium

Question 6

Bretton Woods Agreement

Answer 6

A system of monetary management and rules established after WW2 between allied nations to restrict on foreign exchange transactions. Currencies pegged to the dollar

Question 7

What does ECU stand for?

Answer 7

European Currency Unit - Value determined by the weighted average of participating currencies.

Not to be compared or confused with, but sort of like the Euro before the Euro

The currencies had to be contained within a margin of 2.25% either side of the bilateral rates, with some allowed up to 6%

Question 8

What are bilateral rates?

Answer 8

The value of one currency compared to another

Question 9

Why would Saudi Arabia fix their currency to the dollar?

Answer 9

• America buy ALOT of oil, so they do a lot of trade.
• The dollar is the strongest currency, so backing your currency to the dollar gives it a degree of stability it may not have had before

Question 10

How do governments make sure the value of their currency stays Fixed to the
value of another country?

Answer 10

Openly buying and selling their currency to either give to value or to devalue to depending on the circumstances.

If the pound increases in demand the value of the pound goes up, so the government would have to sell the currency to increase supply to reduce the increase in value under a fixed exchange rate and vice versa. You cancel out each extreme so fight supply with demand and demand with supply