However, continued differences in economic growth rate between member countries lead to trade imbalances. The basic elements of the European Monetary System were exchange rate were agreed in the interval of plus or minus 2.25 percent with a wider range of plus or minus 6 percent, an Exchange rate mechanism, an extension of European credit facility and the European monetary
If the price of oil drop, the futures position leads to an offsetting gain. Similarly if the price of oil rise, the futures position leads to an offsetting loss. It is clear that hedger s a consumer as it purchases an asset in the future and wants to lock in the price. Typically, the purpose of the futures contracts was to hedge its exposure to the price of oil and not making a profit. According to a spokesman for Callon, Eric Williams commented that a swap would be better if foresight to know prices were going to dip the way it did.
The three elements that are stabilizing in this system are - the usage of gold; the non-interest factor; and the netting system. Since gold by itself has value, it is superior from any other fiat currencies. Even though the price of gold does fluctuate, it does so in a minimal amount, usually by a few percentages up or down. Interest rates exist in an economy as a result of lack of liquidity. In a netting system, no shortage of money will take place which means that lenders could not take advantage of charging high interest rates to people that are in need of loans as is the case in the fiat money system.
Changes in interest rate affect currency value and exchange rate. Interest rate and exchange rate are all correlated. Increases in interest rate cause a country 's currency to appreciate because higher interest rates provide higher rates to lenders, thereby attracting more foreign capital, which causes a rise in exchange rates and vice versa also applies. Changes in inflation cause changes in currency exchange rates. A country with a lower inflation rate will see an appreciation in the value of its currency.
Another factor is the per capita income. Such as if high income is increasing demand for housing, but if the income is low there is little demand for housing. The location of the housing affects the demand such as if the housing is nearby to the markets or government institutions the demand will increases. The growth economy of the country effects of the demand, such as if the economy increases, the price of housing will decrease and demand will increase. But when economic growth is low, the price of housing will increase and demand will decrease.
Possibility of hot money flow. High interest rates might be attractive enough for foreign investors and increase their incentives to save in UK, this way demand for £ will increase and cause appreciation of currency. Appreciation as a result will make exports less attractive and less competitive on global market; likewise, imports consumption might rise, as they will be more attractive domestically. Although, this is likely to have minimal impact due to recent depreciation of the currency and strong global expansion All of those changes result in falling aggregate demand (AD) (which consists of Consumption, Investment, Government Spending and Net Exports), as investment, consumption and net exports all will be reduced. Following diagram will help understand how this affects economy.
Due to hot money flows, investors are more likely to save their money in British banks if the UK interest rates are higher than other countries as they will seek the benefits of a higher return in payments. However a stronger pound makes UK exports less competitive lowering exports and leading to an increased dependence on imports hence lowering the total value of net exports. This has the effect of decreasing Aggregate Demand in the economy as net exports are also a component. • There can be a decrease in terms of the economic growth. A Bank of England research paper has estimated that raising interest rates by 1% will reduce the total output by 0.6% over a 2 year period.
Forex trading is a way of investing, where currencies are bought and sold against each other depending on how you are the entrepreneur, based on your valuation or signal, believe that the money will go up and decrease in value against one another. When your broker offers you a price for a currency exchange, he offers two prices for each currency pair; a Bid price (you sell the offer) and an Ask price (you buy the asking price). These rules make sense if you feel like an auction; A person who wants to buy something at an auction puts an offer, which is the price they want to pay. In this case, the international bank wants to buy if you sell them on their bid price. Also, at an auction, someone who wants to sell something will have an asking price, which is the price at which he wants to
Hence, affecting other countries by reducing their surplus as deflation burdens spending power. Arguments for and against Floating Exchange rate The floating exchange or the flexible rate has been used by most countries. The flexible rate allows for independent monetary policies. Unlike fixed exchange rate that is based on gold standard and the metallic standard, floating exchange need no monetary officials to monitor account imbalances, it allows government to have freedom to obtain internal policies and objectives without the external restrictions. In addition, the floating rate is one that is flexible as the name also suggested.
Contracts may be bought for multiples of these amounts, but they cannot be bought for fractions of an amount. For example, a trader can buy wheat contracts for 5,000, 15,000, or 70,000 heads of grain but not for 17,500 or 36,000 heads. All futures contracts mature in a stated month. Traders must therefore specify month as well as commodity in their contracts: March wheat, December corn, or May wood. The reasons for selecting certain months over all others vary from one exchange to another and from commodity to