Last edited by Tehn
Thursday, February 13, 2020 | History

4 edition of Rational speculators and exchange rate volatility found in the catalog.

Rational speculators and exchange rate volatility

Carol Lee Osler

Rational speculators and exchange rate volatility

  • 142 Want to read
  • 2 Currently reading

Published by Federal Reserve Bank of New York in [New York, N.Y.] .
Written in English

    Subjects:
  • Foreign exchange rates -- Mathematical models.,
  • Investments $z United States.,
  • Equilibrium (Economics)

  • Edition Notes

    StatementC.L. Osler, John A. Carlson.
    SeriesStaff reports ;, no. 13, Staff reports (Federal Reserve Bank of New York : Online) ;, no. 13.
    ContributionsCarlson, John A., 1933-, Federal Reserve Bank of New York.
    Classifications
    LC ClassificationsHB1
    The Physical Object
    FormatElectronic resource
    ID Numbers
    Open LibraryOL3476584M
    LC Control Number2005616113

    Since the future exchange rate is predetermined on such a contract, the rate of return is guaranteed as well. One cannot merely look at what the interest rate is across countries but must also speculate about the exchange rate change. Equally important, currency speculators also tend to wield their power in a particular direction: They frown upon and thereby block economic policies that limit profit opportunities—such as policies that give a bigger share of the economic pie to poor and working families. It is detailed work, and because prices are always moving and there are nearly infinite variables to consider, each speculator often develops their own unique way of trading. Volatility and the Choice of Exchange Rate System On the face of it, floating exchange rates would appear to be riskier than fixed rates since they are free to change regularly.

    Although recessions tended to be experienced across a majority of regions throughout the sample period, the occurrence and lengths of recessions at the regional level have increased over time. According to Friedman floating exchange rates will remain relatively stable if the FX market is left to its own devices. If the government is unwilling to force a recession, it will have to let its currency depreciate, either by setting a new, lower exchange rate, or by allowing its currency to be flexible "float". If the UK economic situation deteriorated, then the value of the Pound would likely fall in a floating exchange rate. Speculators believed the government would eventually have to devalue. By selling his crop in advance at a fixed price to a speculator, he is now able to hedge the price risk and so he can plant the corn.

    But the exporter has to pay her workers and suppliers in German currency, and thus needs to exchange the U. The dollar unexpectedly appreciated during the year resulting in a loss. At low levels of speculative activity, speculation will be stabilizing when the dominant shocks to exchange rates are associated exclusively with real economic activity, such as international trade in goods and services. Both fiscal and monetary policy were eased considerably in Germany at the time of reunification.


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Rational speculators and exchange rate volatility book

If her guess is correct, at the specified future date she will be able to buy the currency cheaply in the market and sell it at the higher contracted exchange rate.

Let's say that a U. Currency speculation exists whenever someone buys a foreign currency, not because she needs to pay for an import or is investing in a foreign business, but because she hopes to sell the currency at a higher rate in the future in technical language the currency "appreciates".

Volatile exchange rates can quickly and significantly change the expected rates of return on international investments.

Key Takeaways Volatile exchange rates make international trade and investment decisions more difficult because volatility increases exchange rate risk. Suppose soccer balls purchased from a supplier in Pakistan costsPakistan rupees. After achieving independence inIndia in the s continued to struggle with feeding its population and the government increasingly restricted trading in food commodities.

All these strategies can involve self-fulfilling prophecies that lead to financial turmoil, and may prevent governments from implementing humane economic policies. The more currency speculators are involved in the secondary market, the easier it is for traders and investors to buy and sell foreign exchange when they need to.

This can result in a speculative bubblewhere the speculator activity has driven the price of an asset above its true value.

Speculators are typically sophisticated risk-taking individuals with expertise in the markets in which they are trading. The problem with this perception is that it has not worked out this way in practice. If many speculators sell the currency in the forward market, this will signal that the currency is overvalued, and people will begin selling the currency in the spot market.

The Glass—Steagall Act passed in during the Great Depression in the United States provides another example; most of the Glass-Steagall provisions were repealed during the s and s.

Exercises Jeopardy Questions. When this happens the effects of volatility are concentrated in a very short timeframe and can have much larger economic impacts. In short, speculators regard policies which reduce the short-term profitability of financial and industrial businesses as signals to sell a currency, while policies that expand or open profit opportunities are reasons to buy a currency.

The exchange rate in October was 6. However, the problem is that governments and central banks have had problems keeping their hands off.

Exchange rate risk refers to the potential to lose money because of a change in the exchange rate. The same can be seen in reverse.The Effect Of Exchange Rate Volatility On Share Price Fluctuations In Nigeria Proceedings of 28th TheIIER International Conference, Paris, France, 21st JuneISBN: 2 characterized the Nigerian economy for many years.

Transaction Exposure-Ch. 8. STUDY. Flashcards. Learn. Write. Spell. Test. PLAY. Match. Gravity. Created by. marthac. Terms in this set (19) transaction exposure.

the sensitivity of "realized" domestic currency values of the firm's contractual CF denominated. Traders, strategists, and other participants in the currency markets continuously seek to understand and interpret short-term exchange rate movements.

One data set frequently used in those efforts is a weekly report of net futures market positions held by speculators on the Chicago Mercantile atlasbowling.com by: Understanding Exchange Rate Volatility without the Contrivance of Macroeconomics Robert P.

Flood and Andrew K. Rose* Revised Draft: 6 January, Abstract Exchange rate regimes differ primarily by the noisiness of the exchange rate, not observable macroeconomic “fundamentals.” Fixed exchange rates are typically stable and floating.

Real Exchange Rate Volatility and the Choice of Regimes in Emerging Markets 1. Introduction The choice of an exchange rate reg ime has been and will continue to be a ma jor, but controversial, area of research in economics.

Milton Friedman on exchange rate policy #3

Following Poole () there is some consensus among. paper analyzes key factors contributing to euro exchange rate volatility in the new EU members { the openness of an economy, the\news"factor, and the exchange rate regime. The TARCH model is employed to model the volatility of exchange rates.

The results suggest that the openness has a negative efiect on exchange rate atlasbowling.com by: