Unit 10.00 International Payment Flows

10.01 Understand the components of International Currency Exchange

INTERNATIONAL CURRENCY Money

Money: a medium of exchange used by a society Money can store value and act as a unit for

accounting. Over time money has made a transition from

silver or gold coins that had real value to notes and coins that represent value because they are backed by gold or something else of value.Today, most money acts as a means of exchange

without any real valueMoney has value only because the people who

use it believe in it Currency is the term used for money in

international market.19 2

Types of currencies in international markets

In the international market money is categorized into two types of currencies. hard currency

has the confidence of international traders comes from economically and politically stable

countries. Ex: the British pound, The Euro, US Dollar

soft currency not acceptable for international exchange unrealistic exchange rates economic or political instability within a country. Ex: Mexican peso http://www.youtube.com/watch?v=J1lAQfG1ixE – hard

and soft19 3

The Law of Supply and Demand The law of supply and demand attempts to

explain how changes in the demand and quantity of goods sold in competitive markets impact a price.

Generally, if there is a low supply and a high demand, the price will be high. In contrast, the greater the supply and the lower the demand, the lower the price will be.

http://www.youtube.com/watch?v=XNtjkN-FYBw song http://www.youtube.com/watch?v=t1j3mjEd3wg detail

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The Law of Supply and Demand (cont.)The law of supply and demand is not an

actual law but it is well confirmed and understood realization that if you have a lot of one item, the price for that item should go down.

At the same time you need to understand the interaction; even if you have a high supply, if the demand is also high, the price could also be high. 

The Law of Supply and Demand (continued) demand

the quantity of a good or service that consumers are willing and able to buy at a given price

supply the quantity that producers are willing to

offer at a given price.

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The Law of Supply and Demand (continued)

The changes in demand and supply are based on the:nature of the productnature of competition and the needs of buyers and sellers

The Law of Supply and Demand (continued) The law of supply and demand works for most

goods and services and also holds true for the global demand for currency.

The flow of supply and demand determine the flow of trade and thereby contribute to a currency’s supply and demand which results into fluctuating currency exchange rates.

CURRENCY EXCHANGE RATES The ratio of how much one currency is worth in

terms of another currency Also referred as foreign-exchange rate.Example: $1 US = 42 Indian Rupees or1 Euro = $1.36 US. This means that on a given day 1 US dollar can buy

42 Rupees; or 1 Euro can buy $1.36 dollarsFloating currency exchange rates are based on law

of Supply & DemandDetermined by the demand for a currency and its

supplyhttp://www.youtube.com/watch?v=xwtgByffoUw

exchange rate19 9

Factors effecting Currency exchange rates.

The four major factors that influence the exchange rate between countries are:1. Transactional demand: The amount of

economic activity in a country creates transactions—the more economic activity, the more transactions, therefore greater demand for currency

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Factors effecting Currency exchange rates...(cont.)2. Economic confidence: If international

investors lose confidence in an economy, they may try to sell the currency holdings resulting in to increased supply of the currency and therefore decreased value of the currency.

3. Money supply: Interest rates effect the bank lending activities. When banks drop interest rates, more money is borrowed resulting into increased economic activities and supply of money. However too low of a interest rate causes inflation and that makes the currency less desirable by foreign investors.19 11

Factors effecting Currency exchange rates...(cont.)4. speculative demand: Some international

investors use forward events(ex: elections) to speculate on future currency rates.

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>> Checklist/Exit ticketMoneyHard currencySoft currencyDemandSupplyExchange rateThe four factors that influence exchange rates

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