March 07, 2009
Global Financing and Exchange Rate Mechanisms
Hard currencies are a currency, usually from a highly industrialized country, that is widely accepted around the world as a form of payment for goods and services. A hard currency is expected to remain relatively stable through a short period of time, and to be highly liquid in the forex market (Investopedia, 2009). The forex market is the largest, most liquid market in the world with an average traded value that exceeds $1.9 trillion per day and includes all of the currencies in the world. There is no central marketplace for currency exchange; trade is conducted over the counter. The forex market is open 24 hours a day, five days a week, and currencies are traded worldwide among the major financial centers of London, New York, Tokyo, Zürich, Frankfurt, Hong Kong, Singapore, Paris and Sydney (Investopedia, 2009). Another criterion for a hard currency is that the currency must come from a politically and economically stable country. The U.S. dollar and the British pound are good examples of hard currencies (Investopedia, 2009). Soft currency is another name for "weak currency". The values of soft currencies fluctuate often, and other countries do not want to hold these currencies due to political or economic uncertainty within the country with the soft currency. Currencies from most developing countries are considered to be soft currencies. Often, governments from these developing countries will set unrealistically high exchange rates, pegging their currency to a currency such as the U.S. dollar (Investopedia, 2009).
Hard Currency is used in global financing operations by developed nations. Hard currency is easily traded and bartered throughout the world. Using hard currency ensures that there is an even playing field for all parties in the transaction. Hard currency is important in managing risks because “a company can counter an imminent...