Chapter 19

Currencies and
Foreign
Exchange
Chapter Outline

 Money
 Foreign Exchange
 Foreign Exchange Market
 Foreign Exchange Rate

- Currency Equilibrium
- Effect of Devaluation
Chapter Outline

 Exchange-Rate Systems
- Gold Standard
- Par Value (Adjustable Peg)
- Crawling Peg (Sliding or Gliding Parity)
- Wide Band
- Floating (Flexible) System
 Official Classification of Exchange Rate Regimes
 Evaluation of Floating Rates
Chapter Outline

 Financial Implications and Strategies

- Early Warning Systems
- Hedging
- Leading and Lagging
- Invoicing
- Pass-Through Costs
- Other Strategies
Money

 Hard (International) Currencies vs. Soft

Currencies
 Functions of Currency

- medium of exchange
- unit of account
- store of value
Foreign Exchange Market

 Credit (Financing)
 Clearing
 Hedging
 Spot Market vs. Forward Market
Foreign Exchange Rate

 Currency Equilibrium
 Effect of Devaluation
- Exports and Employment
- Imports and Consumer Welfare
Exchange Rate Systems

 Gold Standard
 Par Value (Adjustable Peg)
 Crawling Peg (Sliding or Gliding Parity)
 Wide Band
 Floating (Flexible) System
Official Classification of Exchange
Rate Regimes

 Floating Exchange Rate Regimes

- independently floating regimes
- managed floating regimes
 Intermediate Exchange Rate Regimes
- soft pegs
- tightly managed floating regimes
 Hard Peg Regimes
- currency boards
- exchange rate regimes with no separate legal tender
Financial Implications
and Strategies

 Early Warning Systems

 Hedging
 Leading and Lagging
 Invoicing
 Pass-Through Costs
 Other Strategies