Mind Map Gallery foreign exchange market
- 377
foreign exchange market
A mind map about foreign exchange market.
Edited at 2020-09-08 01:10:56
- Recommended to you
- Outline
The foreign exchange market
Supply for pounds
if curve is downward sloping
product is price inelastic
increase in foreign demand small
result in a drop on total spending of imports
e.g. 42 suits @ £500 = £21k
purchase power abroad is high when £ increases in value
more attractive as buying things in foreign currencies is cheaper
therefore demand should be high
upward sloping supply curve
product is price elastic
curve will be steep
demand will be significant
this can lead to total spending on imports to increase
e.g. 40 suits @ £600 = £24k vs 60 suits @ £500 = £30k
shifts in supply
increase in supply of pound
increase in overseas interest rates
higher returns sought abroad
outflow of pounds
increase in UK incomes
increase demand for imports
more pounds supplied to foreign currency
speculation
selling the pound because the belief is it will fall in value in the future
this tends to result in the fear happening
can be done deliberately to encourage others to sell, pushing the price down, thereby allowing the speculator to buy back at cheaper price
reaching equilibrium in currency markets
free market
excess demand
price of currency will rise
increasing quantity supplied but reduces demand until equilibrium
price of currency adjusts until demand = supply
value of pound falls
supply and demand fall
normally a result of excess supply
McBurger Index
determines under or over value of currency
compares actual FX rates with what it needs to be to keep prices of burgers in diff countries comparable
mcdonalds burger used as its fairly standard across multiple countries
easier than using PPP
purchasing power parity
which compares a basket of goods (can be difficult to agree a standard basket across countries)
e.g. basket of UK goods = £150, basket of US goods = £300, PPP rate = £1: $2
Overall Impact
dependent on
price elasticity
imports & exports
overseas market competition
proportion of sales exported
proportion of inputs imported
degree to which currency value has changed, & what direction, relative to exports & imports
availability of alternative markets to export to or import from
demand for pounds
shifts in demand
increase in demand
increase in UK interest rates relative to returns available elsewhere
attracts foreign investors looking for high returns in UK banks etc
thereby saving pounds in the UK
shift curve outward
leading to higher exchange rate
increase in pound demand from overseas
increase in income overseas
higher demand for UK products
speculation
big influencer in value of a currency
various events can lead to speculation
e.g. government changes
believe pound will increase in future
buy now and sell for higher price later
demand curve is downward sloping if the pound is expensive e.g. less demand
slope of the curve determined by price elasticity of demand for UK products in foreign currencies
if UK exports = very price sensitive
increase in pound = increase price of product abroad = significantly decreasing demand
steep slope
elasticity is determined by the product
factors which impact price elasticity
reliability
quality
uniqueness
brand power
high increase/ decrease in demand with significant price changes
elastic
low increase/ decrease in demand with significant price changes
e.g. Olympics
Euro
benefits
no currency conversion transaction costs
do not need to worry about fluctuations within the Eurozone
greater stability
easier planning
easier to compare prices of suppliers
force price competition
cons
lose control over domestic country
accepting increases/ decreases in interest rates set by ECB
overview
floating exchange rates
value determined by market or supply & demand
analysis of currency changes
managers concentrate on markets they sell to and buy from
weak currency
low demand
strong currency
high demand or fall in supply
forex is where exchange rate determined
supply & demand determine price of one currency relative to another
or can be fixed by the government
currency value impacts price of a firm's product overseas
impacts exports
impacts imports
stronger value means fewer pounds need to purchase from abroad
thereby reducing import prices
understanding of FX crucial to modern day business
monitor the fluctuations and anticipate changes important as its not controlled by one person
changes can be rapid leading to big movements in currency value
can make financial difficult as hard to forecast value
can also change competitive position
overcoming exchange rate problems
exchange rate is an example of PESTLE factor
outside direct control of firm but significantly influences its success
offset FX changes in one market with another
operate in multiple markets
reduce impact of FX changes
target markets with the same currency
may reduce export opps
reduce ability to buy best inputs at best prices
use future markets
buy currency in advance at fixed price
speculate to offset movements
set contracts in own currency
relative importance of changes in FX
pound increases relative to overseas market
pound price remains the same = import costs reduce
pound price remains the same = import costs reduce
leading to higher profit margins
enable firm to reduce prices
oversea products are less expensive
increase competition if customers choose to purchase overseas
scale of effect depended on ease to switch, and similarity of product
pound price remains the same = exports are cheaper
The foreign exchange market
firms must be able to meet increase in demand
pound falls relative to overseas market
overseas price remains same in foreign currency
leading to higher profit margins
Government intervention
influence or stabilize
fix value
fixed or pegged FX
achieved by buying/ selling currency &/ or using interest rates
increase value
buy own currency using foreign currency reserves
demand increases
increasing equilibrium price
as demand curve shifts right
restricted by the amount of foreign currency reserves are available
increase interest rates
high rates attract overseas investors
decrease domestic demand as borrowing becomes more expensive
changes in supply of and demand for currency
decrease in supply
increase the price
decrease in equilibrium
increase in demand
increase in price
resulting in increased equilibrium
if supply is upward sloping
https://coggle.it/diagram/XyK_6sZTxiaCkouL/t/the-foreign-exchange-market