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IBT - Report Script

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14 views4 pages

IBT - Report Script

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Mayen Drive
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© © All Rights Reserved
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MAGAT - SCRIPT

Paula Magat

Contemporary Exchange Rate System

1. Fixed Exchange Rate System: In a fixed exchange rate system, a country's money is tied to
the currency of another country or a mix of currencies. The government or central bank
intervenes in the foreign exchange market to maintain the exchange rate at a fixed level. This
system provides stability but can be challenging to maintain in the long term.

2. Floating Exchange Rate System (Flexible Exchange Rate System) -


In a floating exchange rate system, currency values are decided by the foreign exchange market,
where they vary according to supply and demand. Central banks usually do not step in to fix
the currency at a specific rate. The majority of major currencies, such as the US dollar and the
Euro, follow a floating exchange rate system. There are 3 different classification of floating
exchange rate

a. Independently or Free-Floating Exchange Rate - The exchange rates are market-


determined and central banks intervene only to moderate the speed of change or to prevent
excessive fluctuations without any attempt to maintain it or drive it to a particular level.

b. Managed Floating Exchange Rate System - In a managed floating exchange rate


system, the central bank occasionally intervenes in the foreign exchange market to influence the
exchange rate. While the currency's value is primarily determined by market forces, the central
bank may buy or sell its own currency to stabilize or influence its value.

c. Dirty Float (Managed Float with Frequent Intervention) - In a dirty float system,
the central bank frequently intervenes in the foreign exchange market to influence the exchange
rate. This intervention can be in the form of buying or selling currencies to counteract short-
term fluctuations.

3. Pegged Exchange Rate (Fixed but Adjustable) - Some countries use a fixed exchange rate
but allow for occasional adjustments to reflect economic conditions. These adjustments can be
periodic or in response to specific economic events.

International Monetary Fund (IMF) identify two classification of peg exchange rate system

Soft Peg - the foreign exchange market usually determines a country's exchange rate, but the
government sometimes intervenes to strengthen or weaken it. There were are 3 types of soft peg

a. Conventional Fixed Peg - a country ties its currency to another currency at a


fixed rate. The currency basket includes major trade or financial partners, with
weights determined by the geographical distribution of trade, services, or capital
flows.
b. Pegged Exchange Rates with Horizontal Bands - The value of the currency
is maintained within certain margins of fluctuation of at least 1 percent around a
fixed central rate or the margin between the maximum and minimum value

c. Crawling Peg (Adjustable Peg) System - In a crawling peg system, a


country's exchange rate is fixed but can be adjusted periodically. The rate is
allowed to change gradually based on a set of predetermined criteria, such as
inflation or balance of payments. This allows for some flexibility while
maintaining stability.

Hard Pegs - the government is the one who chooses an exchange rate

a. Currency Board Arrangement - in a currency board system, a country's


central bank holds reserve in a foreign currency (often the US dollar) equal to the
amount of the domestic currency in circulation. The exchange rate is, therefore,
effectively fixed at a 1:1 ratio, and the central bank's ability to create money is
limited to the amount of foreign currency reserves it holds.

b. No Separate Legal Tender - Some countries have adopted a foreign currency


(such as the US dollar or the Euro) as their official currency. In this case, they do
not have their own separate legal tender.

Determination of Foreign Exchange Rates

1. Supply and Demand - Like any other commodity, currencies follow the basic principles
of supply and demand. If the demand for a particular currency is higher than its supply, its
value appreciates relative to other currencies. Conversely, if there's excess supply compared to
demand, the currency's value depreciates.

2. Interest Rates - Differences in interest rates between two countries can significantly
affect exchange rates. Higher interest rates in one country can attract foreign capital seeking
better returns, increasing the demand for that country's currency and causing it to appreciate.

3. Inflation Rates - A lower inflation rate in a country can increase the purchasing power
of its currency, making it more attractive to investors. Consequently, lower inflation can lead to
currency appreciation.

5. Political Stability, Economic Performance and Geopolitical Events- Countries with


stable political environments and strong economic performance attract foreign investment,
driving increased demand for their currency. On the contrary, geopolitical events like wars and
political crises can significantly impact exchange rates, creating currency volatility due to
heightened global uncertainty. Political stability and economic strength are key determinants
influencing currency values, while geopolitical events can introduce unpredictability into the
foreign exchange market.
It's essential to recognize that exchange rates result from the interaction of these various factors
and the actions of market participants, such as governments, central banks, financial
institutions, corporations, and individual traders. The foreign exchange market is highly
dynamic and can experience rapid changes as these factors evolve. Therefore, exchange rates
are subject to constant fluctuations based on the prevailing economic and financial conditions.

QUESTIONS

What are the problems of regional integration agreements that potentially occur even when
all sides want to reach agreement?

Answer: I believe Potential problems in regional integration agreements, even when all sides
aim to reach an agreement, include disparities in economic structures, regulatory frameworks,
and political ideologies, along with challenges related to sovereignty and benefit distribution.

Do you think that free capital mobility will lead to the inflow of foreign direct investment in
a country?

Thank you for that wonderful answer, I believe Yes, free capital mobility typically attracts
foreign direct investment by providing investors with the flexibility to move funds across
borders for better returns and diversification. However, additional factors like political stability
and economic policies also impact FDI inflows.

What is the difference between a fixed exchange rate system and a floating exchange rate
system, and what are their advantages and disadvantages?

In a fixed exchange rate system, a country's currency value another currency, while in a floating
exchange rate system example UAE dirham of 0.27 is fixed to 1 US Dollar, 3.67 dirhams

another example is Saudi Arabia since they practice fixed exchange rate system your 1 US
Dollar is set or will able to buy you 3.75, currency values are determined by supply and
demand in the foreign exchange market.

Countries with fixed exchange rate, Kuwait, Libya, Morocco, Lebanon

Advantages of a fixed exchange rate system include stability in international trade and reduced
uncertainty for businesses. since exchange rates always have losses and gains it is disadvantage
for a certain country whenever there would be economic crises since it may lead to losses or low
value of their currency.

On the other hand, a floating exchange rate system allows for automatic adjustments to
economic changes, but it may introduce volatility and uncertainty in international trade.

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