chp7 Flashcards
free float
leave it to supply and demand
dirty float
allow float within a certain bandwidth
fixed exchange rate
set at a rate specified by governments
pegged
linked to a single strong currency
Exchange rate is a price function
A function of supply and demand
As demand for a given currency goes up
so does the price of that currency in terms of the other currency( the exchange rate)
As demand goes down the price of that currency will
drop in terms of the other currency
trade surplus
more money coming into the country than leaving it; this pushes $ up
trade deficit
more money leaving the country, this pushes the $ down
US used to have a current account surplus:
it exported more than it imported, which propped up the dollar’s value
A strengthening dollar helps
Importers
Us firms with offshore outsourcing
Foreign debt holders
A weakening dollar helps:
Domestic, import-competing industries
Exporters
MNEs repatriating income from abroad
Spot transactions
See what u get when the account is due
Currency hedging through forward contracts
Hinges on predictions of exchange rate fluctuations
Strategic hedging through geographic spread
By spreading sales/production over many currency areas, it all balances out in the end
