Exchange Rate and Foreign Investments

Question 1

What is Exchange rate?

Answer 1

The price of one country’s currency in terms of the price of another country’s currency. In other words, it’s how we price/value one currency in terms of another currency. For example $1 AUD = $0.78 USD

Question 2

What affects the price of the Australian Dollar?

Answer 2

The free market determines the price of the Australian dollar. Buyers and sellers on currency markets determine the value of the Australian dollar. Put it simply, the value of the Australian dollar is determined by the supply of Australian dollars in the FOREX market and the demand of Australian dollars in the FOREX market.

Question 3

What are the types of floats?

Answer 3

• Clean Float
• Dirty Float
• Managed Float

Question 4

Give a brief definition of the types of floats

Answer 4

• Clean Float: No intervention by the Central Bank exists in the currency market
• Dirty Float: Where the central bank sometimes intervenes in the currency market
• Managed Float: Where the currency is managed by the Central Bank, for example, China has a managed float where the currency’s position is valued low to ensure the international competitiveness of its exports

Question 5

What Causes Changes in Demand and Supply?

Answer 5

Supply movements are determined by changes in the debit transactions of the balance of payments, such as:
- Changes in imports
- Changes in income debits (income sent abroad)
- Changes in Australian investment abroad.

Demand movements are determined by changes in the credit transactions of the balance of payments, such as:
- Changes in exports
- Changes in income credits (income sent into Australia)
- Changes in foreign investment

Question 6

Is Australia considered as a dirty float?

Answer 6

Yes, Where a central bank can intervene in the foreign exchange market to influence the price of the dollar.

Question 7

What does appreciation of currency mean?

Answer 7

The value of country’s currency increases in terms of another priced currency.

Question 8

What does depreciation of currency mean?

Answer 8

The value of country’s currency decreases in terms of another priced currency.

Question 9

What factor affects an appreciation of the currency?

Answer 9

Increase in demand including,
- an increase in exports