Spencer “Del Secksi Mahn” Milliner
This presentation is
Dedicated to Mr. Nelms,
Who taught me how to shatter
Steel bars with my bare fists.
Figuratively speaking, of course.
An exchange rate is the price one currency may
be bought or sold for in another currency.
Exchange rates are necessary as companies and
individuals may be required to use the currency
of the country within which they are doing
business or investing.
Foreign Currency Exchange
Currencies are bought and sold within the foreign
exchange market, also known as the FX market.
The foreign exchange market is a worldwide
network of traders which operates twenty-four
hours a day.
The FX market is the largest market in the world.
FX Market Participants
Banks and other financial institutions comprise the largest
section; they earn profits from buying and selling currencies.
Brokers act as intermediaries between financial institutions and
charge commissions on the transactions they arrange.
Customers who require foreign currency for business or
investments. This includes individuals who need currency for
Central banks sometime participate in the FX market to try and
influence the value of their currencies.
When currencies are purchased by financial institutions or other
traders in large quantity, they are bought at a wholesale price.
When an individual exchanges currency at one of these
institutions, he is usually offered a less favorable exchange rate
and the institution profits.
Foreign Exchange Rates
As exchange rates fluctuate, engaging in FX market
transactions is risky.
There’s always the chance that if you wait on exchanging
currencies (such as the US dollar to the Japanese yen) your
currency (dollars) may become stronger against the
currency you are exchanging for (yen) and you profit. In
this situation, the dollar is considered to have “risen” or
gained value against the yen. However, the opposite is
also possible, in which case your dollar would be able to
buy less yen, and thus “fallen.”
When one currency can buy an increasing amount of
another currency, it is considered “strong” against that
currency. When a currency can buy a decreasing amount
of another currency, it is considered “weak.”
Oh My Another Slide
Having a strong currency allows for cheaper imports, as the cost
of foreign goods drop.
While a strong dollar can buy Americans foreign goods at a lower
price, it makes American goods to foreign customers relatively
more expensive. A strong dollar can hurt businesses who rely
primarily on exporting their goods and services.
With this in mind, it would seem safe to assume that a weak
dollar would increase a America’s exports, as nations with a
stronger currency would purchase more American goods,
improving America’s balance of trade. Right?
Oh My Another Slide Cont.
Well, the answer is sorta. Although a weakened dollar will spur more
exports, a tricky fellow by the name of the J-curve prevents this
from immediately helping the trade balance.
The remainder of this slide is here to prepare you for the following
slide, because it’s just that shocking.
You’ll get it.
The Electric Slide
(it was a pun)
Most orders on imports and
exports are taken several
months in advance.
When a currency’s value
drops, the number of imports
stay about the same, but the
cost of these imports rise in
comparison to the home
The value of exports tend to
This will cause the balance of
trade to worsen until the
volumes of imports and
exports adjust to the new
Methods of Exchange
Fixed Exchange Rates
(This image has significant
FREAKY FRACTAL FRAME
Oh my this shouldn’t be here
Hello Mr. Nelms
CLICK AGAIN ELLIS!!11
Fixed Exchange Rates
Fixed currencies are currencies
for which the government
maintains a fixed value.
Fixed rates do not fluctuate from
day to day.
A government that decides to
keep their currency fixed must (Angora rabbits are mysterious
work to maintain it. fellows, unlike fixed exchange rates)
Fixed exchange rates are usually This system prevents inflation,
used by developing countries however if the currency’s real
with immature economic market value differs from the
systems. fixed amount, it can spell
Fixed Exchange Rates Cont.
Fixed exchange rates played a much larger role when currencies
were tied to gold.
Exchange rates were determined by the amount of gold a currency
could be exchanged for, AKA the gold-exchange standard.
The United States abandoned the gold-exchange standard in 1971
under the Nixon administration, and adopted floating rates.
Although some countries still have fixed exchange rates, most have
turned to floating or hybrid.
Floating Exchange Rates
Floating exchange rates are determined by supply and
Most countries with stable economic
markets have floating currencies.
Floating exchange rates are usually
Floating currencies are subject to
(Felines are fickle beasts, as
are floating exchange rates)
Hybrid Exchange Rates
Many countries utilize a mix of floating and pegged exchange
Governments peg the exchange rate of their currency to another
(such as the dollar), which does not change from day to day.
The government periodically reviews the pegged rate, and makes
adjustments reflecting shifts in market value.
Other actions by the government (such as changes to national
interest rates or import tariffs) can also change the currency’s
Super Secret Cute Slide
Wait a Minute! You Never Told Us What
Specifically Affects Exchange Rates!
I would have gotten away with it too, if it wasn’t for you meddling kids.
Exchange rates respond to a number of events, such as business
cycles, tax laws, stock market news, expected inflation, political
developments, central bank policies, among other things.
The currency of a country with a growing economy, price stability,
and a wide selection of goods would be in higher demand than
that of a country suffering from inflation, has few profitable
exports, and political unrest.
There are many other reasons that a particular currency may be
strong, such as the country may have high interest rates giving
foreign investors increased returns or news of instability in other
countries may move investors into their currency, in an attempt to
The European Union is an international organization of
democratic European Countries.
The EU was formed after World War II, both as a means of
prevention for future conflicts and to ensure European
The EU has grown from its six initial members to these
twenty-five: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy,
Luxembourg, the Netherlands, Portugal, Spain, Sweden, United Kingdom, Cyprus, Czech Republic,
Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia, Chocolatonia.
European integration - countries delegate sovereignty on
specific matters to common institutions within the EU,
which can then democratically create decisions.
On January 1, 2002 the euro became the single currency of
twelve of the states within the European Union, specifically Belgium,
Germany, Greece, Spain, France, Ireland, Italy, Luxembourg, the Netherlands,
Austria, Portugal, Finland, and Chocolatonia.
As 144 billion euros were put into general circulation by the
central banks of the participating countries, national currency
notes and coins were removed from circulation.
February 28, 2002 marked the last date that the national
currencies would be considered legal tender, and the switch to the
Euro was complete. Former national notes and coins can still be
exchanged for Euros for an extended period of time.
It has become the second largest currency in the world, only
behind the US dollar.
The right man in the wrong place can
make all the difference in the world.
So wake up, Mr. Nelms.
Wake up and smell the ashes.
High above the lesser European Union members,
Greater Chocolatonia floats among the clouds