This website uses cookies to ensure you have the best experience. Learn more

Interest Exchange Rate Essay

3735 words - 15 pages

Executive Summary
It is important for companies and investors to have a firm understanding on the forces driving exchange rate changes as these would affect investment and financing opportunities.
This report analyzes the movements of three currencies, Australian Dollar (AUD), Icelandic Krona (ISK), and Indian Rupee (INR) against US dollar, and suggests events that may cause the violations of three chosen currencies. Analysis shows that factors including but not limited to inflation rates, interest rate differences, foreign investment as well as demand and supply of domestic currency are highly correlated with exchange rate changes in chosen currencies.
Based on the analysis, Purchasing ...view middle of the document...

0 Introduction
The aim of this report is to provide an analysis on the chosen exchange rates in relation to the given questions. Analysis on the specific rates is based on a 5-year period from 2006 to 2010.
2.0 Question 1

Figure 1 Exchange Rate of AUD/USD Over Five Years
Data sources:
The last five years of data from the Reserve Bank of Australia (RBA) is analyzed to show the movement of AUD. Figure 1 shows the fluctuant appreciation of the AUD from 2006 to 2010. The AUD appreciated from January 2006 until July 2008 where it depreciated due to the world wide recession. Figure 2 shows that AUD depreciated to its lowest in October 2008 by almost 15%. However, the AUD bounced back with America acting on the economy to resolve the crisis in March 2009.

Figure 2 Percentage Change of AUD/USD Exchange Rate
Data sources: rate.html
As Australia is the world’s third largest exporter, the AUD, considered as a “commodity currency” is dependent on the price of commodity such as gold (Jia, 2010) which is often associated with AUD/USD as illustrated in Figure 3. By 2008, the recession had reached its nadir. The demand of commodities decreased significantly, and prices fell sharply with crude oil diving to around USD$40 per barrel (Forbes, 2009). October 2008 saw the AUD plunged by 16.4%, the biggest drop over the five year period, as gold prices fell to USD$730.57. When gold prices surged by 10.4% reaching USD$975.5 in May 2009, the AUD appreciated sharply by 8.9%.

Figure 3 Trends of AUD/USD and Gold Price
Data sources:
Figure 1 shows, between June 2008 and December 2008, the exchange rate of AUD fell significantly from USD$0.9626 to USD$0.6928, which may be caused by merchandise trade balance. In 2008, the subprime crisis deepened and with the collapse of Lehman Brothers, a tremendous impact was felt across the global financial market. Currency carry trades which had been practiced for almost eight years were ceased (Kathy Lien, 2010). As many banks had stopped the financing of trade, world trade volume tumbled with the Baltic Dry Index (BDI) retreating by more than 90%. Australia, being an export-driven economy was badly affected by the sluggish international trade.
AUD appreciate continuously from October 2006 to December 2006. In the same period, RBA increased the interest rate from 6.00% to 6.25% (RBA, 2011). This attracted more foreign investment and lead to the appreciation of the AUD as shown in Figure 3.

Figure 4 AUD/USD Exchange Rate and Interest Rate over Five Years
Data sources:
Mean 0.834323 Skewness -0.26454
Standard Error 0.011879 Range 0.3725
Median 0.844 Minimum 0.6438
Standard Deviation 0.092017 Maximum 1.0163
Sample Variance 0.008467 Sum 50.0594

Other Papers Like Interest Exchange Rate

Exchange Rate Essay

4834 words - 20 pages foreign market and the volatility of returns in stock market. Khan and Sajid (2005) investigated both the long and the short run relationship between real money balances, real income, inflation rate, foreign interest rate and real effective exchange rate with reference to Pakistan over the period of 1982:Q2 to 2002:Q4. They use ARDL and estimated results indicate that in the longrun real income

Foreign Exchange Market Essay

1028 words - 5 pages agree that there are three factors have an important impact on future exchange rate movements: the country's price inflation, its interest rate, and market psychology. The law of one price states that in competitive market free of transportationn costs and barriers to trade, a single product will have the same price in different countries. Inflation is a monetary phnomenom. It occurs when the quatity of money in circulation rises faster than the

Finance Questions

673 words - 3 pages of interest attached to them and this can vary according to the way in which the Bank of England sets interest rates and it can be high. If interest rates rise then it can add to business costs. Question 3: e) The spot exchange rate is the price for immediate exchange. Immediate usually means within two working days. However, the forward exchange rate refers to an exchange rate that is quoted and traded today but for delivery and payment on a


978 words - 4 pages . exchange rate risk includes economic risks translation risks , act. Transaction risks A firm might got transaction risks whatever it has cash or savings account in a bank.its values were impacted by fluctuant changes when the Currency exchange processing. The example of transaction risks A JAPAN company got a loan of Â¥10 million for one year at annual interest rate of 3% in the globe financial market. After get the credit, the firm exchange Â

Carry Trade

1241 words - 5 pages rate of E$/€1. Now with the ECB action we illustrate the increase in money supply by a shift to the left of the expected Euro interest rate. Foreign exchange market equilibrium is now at point 2’ with a new exchange rate at E$/€2. Hence the Euro depreciates against the Australian dollar. The expected dollar return of Euro deposits is now lower and hence less attractive in comparison with the more lucrative Australian dollar deposits [krugman

Hedging Dozier Industries

1191 words - 5 pages where. There is a handy rule for this. Take the exchange rate quote that you are using, here $/£. Think of this in general as X/Y. So, the money market formula is, in general, (X interest rate – Y interest rate) / (1. + Y interest rate) or, in shorthand, (X – Y) /(1 + Y) So if you were using a yen/dollar quote for the exchange rate, you would have yen rate minus dollar rate divided by one plus dollar rate. Note that none of this

Exchange Rates

1127 words - 5 pages 6 Factors That Influence Exchange Rates: Aside from factors such as interest rates and inflation, the exchange rate is one of the most important determinants of a country's relative level of economic health. Exchange rates play a vital role in a country's level of trade, which is critical to most every free market economy in the world. For this reason, exchange rates are among the most watched, analyzed and governmentally manipulated economic

Econ Hw 4

1371 words - 6 pages HW 4 Solutions 2. a. Percentage change of exchange rate from 2009-2010: Canada=(0.9643-0.9225)/0.9225=4.53% Mexico=(0.0788-0.0756)/0.0756=4.23% China=(0.1473-0.1454)/0.1454=1.31% Japan=(0.0112-0.0105)/0.0105=6.67% b. Percentage change in the nominal effective exchange rate for the United States between 2009 and 2010: =(4.53%*36%)+(4.23%*28%)+(1.31%*20%)+(6.67%*16%)=(+)4.14% United States' effective exchange rate has


1586 words - 7 pages of money each day so that the quantity of real money is $600 billion. (OPEN MARKET OPERATIONS (OMO)) - When the Central Bank buys securities, it pays for them by creating reserves for the banks. - When the Central Bank sells securities, they are paid for with reserves held by banks. (Monetary Policy Transmission) When the Reserve Bank lowers the cash rate: 1 Other short-term interest rates and the exchange rate fall. 2 The

Factors Influencing Exchange Rates

575 words - 3 pages There are financial, political, social and economic factors that determine the value of one currency against the next. And they are all rising or falling relative to each other. "Aside from factors such as interest rates and inflation, the exchange rate is one of the most important determinants of a country's relative level of economic health. Exchange rates play a vital role in a country's level of trade, which is critical to most

Definition of 'Interest Rate'

1683 words - 7 pages DEFINITION OF 'INTEREST RATE' The amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets. Interest rates are typically noted on an annual basis, known as the annual percentage rate (APR). The assets borrowed could include, cash, consumer goods, large assets, such as a vehicle or building. Interest is essentially a rental, or leasing charge to the borrower, for the asset's use. In the case of a

Related Essays

Transaction Risk Essay

661 words - 3 pages University of Phoenix Material Week Four Individual Assignment: Financial Transaction Risks Describe the risk exposure(s) in the following financial transactions. Identify which transactions are influenced by interest rates or interest income. (CAUTION: Some can be influenced by both!) Risk Types: Interest rate risk, Credit risk, Technology risk, Foreign exchange rate risk, Country or sovereign risk |Financial Transactions

International Trade Essay

2388 words - 10 pages from 100 to 120 yen, the quantity of USD that people plan to buy in the foreign exchange market decreases. 2. Interest rates in one country and other countries: People and businesses buy financial assets to make a return. For example, the higher the interest rate that people can make on US assets compared with foreign assets, the more US assets they buy. What matters is not the level of US interest rates but the US interest rate minus the

Interest Rate Parity Essay

2283 words - 10 pages Interest rate parity | A theory that the interest rate differential between two countries is equal to the differential between the forward exchange rate and the spot exchange rate. Interest rate parity plays an essential role in foreign exchange markets, connecting interest rates, spot exchange rates and foreign exchange rates. Interest rate parity, or sometimes known as International Fisher effect, is an economic concept, expressed as a

Forecasting Methods Essay

1461 words - 6 pages Rates 6 Table 2: Inflation Rates 6 Table 3 : Balance of Payments 6 Table 4 : Spot Exchange Rate 7 Explanation and Usage of Data: Using the website Data World Bank interest rates, inflation rates and balance of payments are consolidated in the tables section. Forecasted future spot exchange rate between Japanese yen and US dollar: A country’s import/exports affects exchange rates just as exchange rates affect the level of imports and