Supply and demand for currencies establishes prices in the foreign-exchange market. Demand for a country’s currency increases when foreigners buy that country’s products. Supply of a country’s currency increases when the residents of a country buy foreign products.
2.What determines supply of any given currency in the foreign-exchange market?
The means by which equilibrium is reached in a fixed exchange system differs according to the time frame in question. In the short term, equilibrium is reached as central banks buy or sell gold and/or currency from their official reserves account. In the long run, equilibrium is achieved as a country’s export competitiveness is affected by the inflation or deflation that may occur when the money supply changes as a result of the short-run moves to equilibrium. (Pages 161-163)
3. How are prices established in the foreign-exchange market?
In a flexible exchange-rate system, equilibrium is reached through the market forces of supply and demand. For example, when the supply of a currency is too high, prices will fall until the quantity demanded equals the quantity supplied. (Pages 163-164)
4.What is the role of international banks in the foreign-exchange market?
The role of banks in the foreign-exchange market is varied. They play a major role in both the wholesale and retail markets. In the wholesale market, international banks are responsible for some 83% of all foreign-exchange transactions as they trade for their own accounts and for customers. At the retail level, international banks provide assistance to commercial customers, speculators, and arbitrageurs that require foreign currency in the spot or forward markets.
5.Explain the different techniques that firms can use to protect themselves from future changes in exchange rates.
There are several techniques that firms can use as they try to protect...