Foreign Exchange Competition

Student------

Forex / € Euro

Investment

/ Buying
rate / Holding of foreign currency / Selling
rate / €
Euro Holding / Profit or
Loss
1.
2.
3.
4.
5.
Total / €1m

Prediction for € \ $ exchange rate------

Foreign Exchange Competition

Student Record

Forex / € Euro
Holding / Buying rate / Holding of foreign currency / Selling
rate / € Euro
Holding / Profit or
Loss
1.
2.
3.
4.
5.
Total / €1m

Prediction for € \ $ exchange rate------

[To be used in the event of a tie]

Exchange Rate Definitions

Exchange Rate

This is the external value of a currency, how much one unit of currency is worth in a foreign currency. [€1 = $1.48]

Appreciation

This is the rise in the value of currency due to market forces, e.g. €1 = £.68 to €1 = £.93.

Depreciation

This is the fall in the value of currency due to market forces, e.g. €1 = £.68 to €1 = £.65.

Revaluation

This is where the central bank officially increases the value of currency, e.g. €1 = £.68 to €1 = £.93.

Devaluation

This is where the central bank officially reduces the value of currency, e.g. €1 = £.68 to €1 = £.63. The last devaluation affecting the Irish economy was in January 1993 when the Irish Punt was devalued by 10%.

Exchange Rate Systems

This is how the value of a currency is determined. These systems can be fixed, floating or a mixture of both.

Fixed Exchange Rate System

This is where the exchange rate is fixed at a certain rate and is not subject to market forces. Examples of this are the Gold Standard and the Euro system 1999 to 2002. Countries can also fix their exchange rate to another major currency, up until 1979 the Irish currency was fixed at parity against sterling [IR£1 = ST£1] and the Chinese Yuan was fixed against the US$ until recent times.

Floating Exchange Rate System

In this type of system the exchange rate is determined by market forces, i.e. supply and demand for the currency. The rules of the market apply, a glut will cause a fall in the price of the currency [depreciation] while a shortage will cause a rise in the price of the currency [appreciation].

Currency Risk

When trading in a floating exchange rate system there is a currency risk when exporting and importing as well as in foreign borrowing. Trade is usually conducted on a credit basis which means that at the end of the credit period the exchange rate may have changed which can result in the seller losing money as the currency could be worth less.

Currency Speculation

A currency may be bought or sold for reasons other than trade. A speculator is a person or organisation who predicts that a currency may appreciate or depreciate and buys or sells the currency. If their prediction comes true they sell or buy the currency again thereby making a profit on the transaction.

Currency Worksheet

  1. A fall in the external value of the € due to market forces is called

  1. What recent announcement by the ECB is likely to affect the value of the €?

  1. What way is the currency likely to be affected?

  1. Name the currency of Russia.

  1. A decision of the ECB to increase the value of the € is called

  1. People who buy and sell currency in the hope of making a profit are called

  1. Name the currency of Denmark

  1. What situation on the currency market will reduce the value of the currency?

  1. Give 2 ways in which a central bank can help to increase the value of a currency without officially raising the rate.

  1. Give 2 ways in which foreign trade affects the value of a currency

  1. Name the currency of Estonia

  1. If you are investing in a currency, e.g. €1m in US $, show the calculation that must be made.

  1. Name the currency of Singapore

  1. How can your holding of a foreign currency be valued in Euros?

  1. €1 = £1. €1 = £.9. What is the change in the value of the €?

  1. Name the currency of Korea

  1. €1 = £1. €1 = £1.023. What is the change in the value of the €?

  1. What is the risk of investing in a single currency?

  1. Name 3 EU states that are outside the Euro

  1. Who is the head of the ECB?

C.Copeland Resources for Economics