World currency

Definition

In general terms, a world currency refers to the currency widely accepted by the majority in international trade. The world currency is thus vastly used in majority of international transactions and also serves as the reserve currency in the World. As a consequence, the actions of the nation with the currency serving as the World currency usually have a ripple effect to the World market and other nations with extensive use this currency. There before the particular nation makes any changes it has to consult other major Word players. In the past, the US dollar has served as the World currency but the Euro is slowly catching up.

The Gold Standard

In the advent of modern international trade coins pegged on their weight of gold in their make up in what was known as the Gold standard were used in trade. Gold was the reserve item for all member states. Each country’s currency had its value per ounce of gold and for there to be an exchange in currency; one currency had first to be converted to gold then backs the other currency. There were no institutions or laws to oversee the implementation of the exchange rates. The member countries’ nation governments however, pledged to buy and sell gold at the fixed prices. This system however did not last long as a shortage of gold and the starting of World War 1 put to a hold any trading activities during the period. After the war, a few nations tried to revive the Gold Standard to no avail. These events build up to the 1944 Bretton woods talks.

The US dollar

The US dollar was installed as the World reserve currency during the 1944 Bretton Woods talks. This followed the failure of the Gold standard system due mostly to shortage of gold supplies. The member countries to select a variable that could be controlled and the U.S.A was the World Superpower, its currency was selected to act as the world currency. All other international currencies had to pegged against the US dollar. The exchange rates of other currencies were fixed against the US dollar with a bound of 1% i.e. the exchange rate could be adjusted upwards or downwards about the fixed rate to a degree of 15. Any greater change had to be approved unanimously by all member countries.  The US dollar was used to this status until 1971 without any challenge to the title. The US dollar has only be challenged by two currencies ever since; the Japanese yen which was used in the 1980s and most recently by the Euro.

The Euro

Since the late 1990s, the dominance of the US dollar has been majorly eroded by the euro. This is mainly due to the fact that it is representative of the greater European countries with all but one member (Britain) countries of the European Union adopting it as the national currency. Other countries outside the euro-zone seeking to trade in the region have also adopted the Euro as the reserve currency of choice.

Trading systems

Introduction

Taking a look of almost everywhere, the trading system is getting more and more sophisticated or automated machines taking over human functions in transacting process/ the most common of these are the new softwares currently in use in many aspects of trading due to their nature of simplifying the whole process thus saving a lot of money and time. Trading system is a term used to refer to the set of rules guidance and indictors that allow the main entry and exit areas/points during the trading process.

Why use trading systems

A study of the human work rate quickly shows that trading can help on saving up time and may even function faster. Due to the tireless nature of machines, they do not require breaks as humans do from time to time. This usually takes up a lot of the work time that could otherwise have been used to transact business. The trading systems can be relied upon to work tirelessly 24 hours a day, seven days a week without any complaints. Looking at the statistics of the work rate and work performed, it would also seem that these trading systems are very cheap in comparison to employ a person.

Where can trading systems be used

The softwares in the market have a wide range of scope in which they can be utilized effectively and effectively. Such areas include the banking the masses, in the forex market where automated trading systems can take and make bids thus facilitating money exchange without human intervention and also in the stock markets where stocks for various companies are traded.

Advantages of trading systems

First, trading systems have no emotion which is usually taken to be the biggest flaw of human interests. Due to fear of risk which may in form of losses, investors may be in a situation where they are second guessing thus end up either losing or failing to take advantage of available opportunities. Second, trading systems optimize time to work ratio due to their effective nature in performing tasks. 

Disadvantages

The major short comings of the trading systems is their complexity. Most trading system require a solid understanding of technical analysis in order to operate them initially and also checking upon their. Acquiring these skills necessary to run the systems is no mean heat second, development and operational of the systems cannot guarantee consuming task. Also, development of the system cannot guarantee operational of the system. The project may fail to launch even after a lot of time and other inputs being put and developing it. Thirds the trading systems do not guarantee to operate without any glitches. Due to the nature of computer of computer systems, one glitch could be very costly in terms of either having them repaired or even in terms of making wrong trading decisions.

Conclusion

Though trading may function generally more better than human beings, it is not just yet time to replace the work force with the systems. The development and operation of the tasks is no mean feat by any standards. However, it should be outed that a well developed system is worth a shot in carrying out the related functions effectively

Online transaction processing

 Introduction

Ever since the advent of and the use of online currency to transact various forms of business, many forms of aids to manage swift processing have been developed. Currently, online transactions are the fastest form of transacting businesses. Online transaction processing refers to a group of well specialized systems that manage online transaction-oriented applications.

Where can they be used?

These technologies are on offer for use in various industries such as the airline, banking, manufacturing and forex industries. Through use of these systems, the above mentioned industry firms are able to manage massive workloads at low costs and efficiently. In the recent there has been a surge of demand for quick movement of money on the internet to facilitate transactions. As a consequence, new forms of online currency “banks” such as PayPal and Alert pay have come up to facilitate receiving and making of payments on the internet. The success of these forms of banks generally relies on the use of online transaction processors.

Advantages/ benefits of processors

The main benefits of these systems are that they are efficient, quick and quite easy to use. On top of all these the systems are generally cost effective if adopted and implemented in the proper manner. The ease with which online transaction processors carry out their tasks is to behold. A task that would take a person to complete in a couple of days usually takes the processors a couple of hours if no minutes. On top of this, they do not leave any paper trail thus they quite manageable especially for large transactions. This makes the systems ideal for large firms and companies that would otherwise spend a lot more in employing staff to carry out the tasks with less efficiency. Through use of these systems, one is able to achieve the goals of cost-effectiveness and costs-benefit optimization in business planning.

Disadvantages/ shortcomings of the processors

As is with most online systems, the greatest concern with these online transaction processors is the trust and reliability issues. The systems are not as secure as their offline counterparts and are thus more susceptible to either indirect or direct attacks. Also, due to data corruption may cause unavailability of the system as a whole thus costing the users quite large sums of money. On top of these, as is with all systems, regular maintenance is a requirement so as to ensure that they are secure and functioning properly. As a consequence, the system may have to go offline this period and for firms depending solely on the systems incur losses thus defeating the goal of cost benefit analysis in business planning.

Curbing problems the problems associated with the processors

Since there is no absolute way to determine whether the systems in use are completely secure from attacks, the only other option is to try and acquire these systems from re-known firms that provide insurance against such threats and other vulnerability issues. Other measures may include constant maintenance to ensure that the systems are secure for day to day use.

Modern money transfer systems

Introduction

Money is an essential tool in our day to day lives and as a consequence, efficient ways of getting it from point to another are also an essential part of life as well. The systems should fast, secure and also guarantee the client that the money will certainly get to the intended destination

Over the years, various ways of transferring money were used but none are more secure and faster than the modern money transfer systems. Most of the modern money transfer entails non-cash transfers i.e. there is no physical movement of money from one point to another. Of the current systems, the most common include use of banks to make account to account money transfers, use of wire transfers, electronic funds transfers, and email money transfers.

Modern money transfer

In Europe and other well developed economies, money transfer systems such as the bank transfers are the most common form of payment. Therefore, money transfer is an essential tool in that it facilitates purchase of goods and services, payment of bill etc. through the use of debit and credit cards, the velocity/ speed of money in the economy is enhanced.

The evolution of money transfer systems reached its peak with the introduction of internet currency. This allowed purchase and sale of commodities and services over the internet. With this, there was a need for some form of banks to facilitate the payment and receipt of money over the internet without utilizing the services of conventional banking systems. These “internet banks” have grown over the years and the fact that they can actually be linked to client’s bank accounts has made their popularity grow over the years.

The latest innovative way of transferring is the use of mobile phones. This was the brain child of Safaricom, a Kenyan mobile phone service provider. The service known as MPESA helps in transfer of money and is quite helpful to the un-bankable in the society as it only uses one’s card and other national identification documentation to use. One does not have to have an account of some form with the banking institutions as is the requirement with most other money transfer systems. The service is slowly catching up in other parts of the World.

Cost of money transfer

The money transfer service providers usually charge certain fees depending on the quantity of money as well as the distance of money transfer. Money transfers across boarders are usually subject to higher commissions/ charges. To facilitate money transfers to different locations in the World, these money transfer agencies have to have offices, agents or representatives strategically placed to maximize business returns and good service delivery.

Advantages of modern money transfer systems 

This form of the transfer is fast compared to the distance that is covered, other alternatives like cheques takes a longer time compared to this. 
The transfer is more flexible and one can easily move money from one bank to another or even from one country to another without following long procedures.

iii.    This transfer is more secure considering there is no money in cash-form; it just needs use of passwords and security checks that only the involved parties are well informed.

iv.     This mode of money transfer promotes foreign currency exchange as the sender sends in their own domestic currencies which are later converted in to the other currency depending on the rate of currency exchange.

Disadvantages of modern money transfer systems

I.                    Due to use of computer systems in most of modern money transfer systems, trust and reliability issues are a constant threat.

International trade

Introduction

International trade refers to the selling and purchasing of goods across boarders i.e. between different countries. International trade allows for expansion of local markets into the world frontier due to the possibility of currency conversion in the foreign exchange markets. This kind of a market gives birth to what is generally; the forces of demand and supply influence the running of the market.

How is it different from domestic trade?

First, this sort of trade allows for movement of goods and services across boarders unlike in the domestic markets. International trade is what give rise to the import and export business in the world. Second, more than one currency is used and as such currency conversion mechanisms have to be in place to execute this kind of trade.

Why participate in international trade?

International trade exposes consumers and users to various types of goods and services that vary in terms of prices, quality and quantity measure. In the current economy, almost every single type of available commodity can be found no equal measures in most countries thus allowing consumers to choose in terms of the tastes and preferences without any restrictions. There are several theories in place to discuss international trade.

Purchasing power parity (PPP)

This is a theory in international trade that articulate that one should be able to purchase the same basket of goods with his or her money in different countries given that the exchange rate regime in place is thereby floating one. As a consequence, international trade has guidelines on how it should be carried out.

Law of one price

The law states that one should be able to purchase commodities at the same price at the preparing exchange rates. As such given the quality of goods produced in two different countries to be the same, one would not prefer wither over the other since the quality and prices are the same.

Advantages of international trade

The main advantage of international trade is the provision of a great variety of goods and services from which to pick thus maximizing the welfare of the consumer. Second, international trade brings about efficient and appropriate allocation of resources among the producers to terms of comparative advantage. Taking into consideration the comparative advantage factor in production among different allows for specialization thus in the end there will be a lot more time available for leisure for the workers as well as more consumption than before. Lastly through opening of the markets, a lot more employment can be created for man individuals in various sectors of the economy. International trade helps in the generation of more employment through the rising of small niche industries that are essential in sustaining the demand for a majority of countries.

Disadvantages of international trade

Due to the opening up of the markets and need to satisfy demand for the whole world, it could lead to a depletion of exhaustible resources such as natural gas and oil. Also due to the opening up of the markets, most of the small industries and also infant industries will probably be driven out by the already established industries from well developed nations. This is essence will ensure that these small countries will never be able to sustain themselves adequately without making use of imports from abroad.

International money transfer

Introduction

This is the transfer of money involving a non-cash form of money. This form of money transfer has the following modes of payments:

Wire/Credit transfer

This transfer is electronic and it is done from one individual or institution to another the method is considered more secure as each and every account holder must have a proven identity

Electronic funds transfer

 It relies mostly on computer-based systems and can be done within an institution or by different institutions.

Email money transfer

This is mostly based in Canada and involves both individual and institutional accounts .it is common in Canadian financial institutions.

Giro transfer

This is done from a bank account to another bank account and the transfer comes from the person who is paying transferring money to the payees.

Transfer by Companies.

 This involves international transfer companies like Western union, Moneygram etc. they are the most commonly used money transfer methods.

Mobile money transfer

This is the type of money transfer which involves mobile phones,it was started by safaricom a company in Kenya and which is part of Vodacom of the United Kingdom and it is rising to popularity with many people acquiring mobile phones.

Advantages of international money transfer 

This form of the transfer is fast compared to the distance that is covered, other alternatives like cheques takes a longer time compared to this.

ii.      The transfer is more flexible and one can easily move money from one bank to another or even from one country to another without following long procedures.

iii.    This transfer is more secure considering there is no money in cash-form, it just needs use of passwords and security checks that only the involved parties are well informed.

iv.     This mode of money transfer promotes foreign currency exchange as the sender sends in their own domestic currencies which is later converted in to the other currency depending on the rate of currency exchange.

v.       Some international money transfer systems eg giro transfer do not require the immediate assent of the receiver unlike email transfer where both the sender and the receiver must intervene.

Disadvantages of international money transfer

I.                    Due to changes in currency rates of exchange the transferred amount might end up being less than the intended amount as it reaches its destination because of high rates of exchange between the two currencies.

Requirements for international money transfer

For one to send or receive money by international money transfer the following information is required:

I.                    Official identifications of both the sender and the receiver.This is to verify whether the sender and receiver are disclosing their real identities and to avoid loss of money.

II.                  The bank account of the receiver, the banks swift code, address, bank account number. This is to ensure that the money goes to the intended receivers account.

III.                The time at which the money is sent is also essential and is required and the time it is withdrawn is also recorded.

Conclusion

From the above illustrations we have seen the various forms of international money transfer and their merits and demerits.

The cost of holiday making abroad

Holiday maker’s problem

The biggest problem that faces holiday makers intending to travel abroad may probably the differences in holiday exchange rates. During peak holidaying months the exchange rates usually sour to dizzying heights thus making holiday making a very costly venture to undertake. The holiday maker should therefore research carefully before throwing money at what could potentially be a bankrupting experience. The research should not only be restricted to the sites/scenes and security but also a thorough study of the country of interest’s foreign exchange markets trends and behavior. The aim of the holiday maker should be ensuring that whatever budget he/she has set aside for the trip takes him/ her as far and for as long as possible.

Looking at various bureau de exchange rates at the airport and port terminals, one would most probably turn back and head home. The pond to dollar rate has greatly depreciated in anticipation of increased travel demand during the Easter period. Movement out and into Europeans practically triples during festive seasons like Christmas and Easter. This is the time that the foreign exchange brokers seek to maximize their profits by squeezing every single cent out of the travelling public.

Though there is the presence of credit cards that one can use to withdraw cash from anywhere in the World at probably the best foreign exchange rates, we still cannot help it but find ourselves queuing at the various bureau de change booths at airports or sea ports because the unreliability of these items is well documented. No one wants to find themselves stranded in a foreign country with no loose cash because the credit card has problems. As a consequence, before travelling, the holiday maker has to visit the best rate offering bureau de change to acquire some foreign cash balances. Also, most credit cards have an extra charge/ commission deducted from them in the event that money is withdrawn abroad. The charges may be quite hefty to an extent that the holiday may opt to carry cash balances instead.

Apart from the issues related to foreign exchange rates, other problems that may be encountered by the holiday maker include; hiked fare prices during peak seasons such as during Easter, hiked hotel and other accommodation facilities boarding fees etc. in general, the whole holidaying experience becomes one hell of a rip off especially when the experience turns out to be not so pleasant.

The other problem that faces the holiday maker is that of holiday destination selection. It is quite evident that there are generally specific destinations that majority if not all holiday makers would love to visit. The destination may depend on, the mood, time available for holiday making, the objective of travelling and the budget constraint faced by the holiday maker. Other factors may include government restrictions that may be in place about travelling to certain areas in the globe e.g. the government may restrict its citizens from visiting war tone regions for their own safety,

Gold standard

In the past, before the late 1870s, many countries in existence used gold and silver as their currency. By the 1880s, the countries participating in international trade had agreed on an exchange rate system known as the “international gold standard.” Under this new arrangement, each member defined the value of its unit currency in terms of gold. The gold was precisely measured in terms of ounces with each ounce containing exactly 480 grains.

Under this method Britain defined its sterling pound gold coin to contain 113.0016 grains of pure gold and as such the price / exchange rate value of gold for Britain was fixed at 4.248 sterling pounds per ounce. Applying the same format as above, the in U.S.A set its 1 dollar gold coin to contain 23.22 grains of pure gold. Since there were 480 grains of gold per ounce of pure gold, the price of gold in terms of US dollars was given as 20.67 US dollars per ounce of gold. The mint parity between 1 sterling pound gold coin and 1 US dollar gold coin was given as 113.0016/ 23.22 which was equal to 4.87 grains. Similarly, the exchange rate between the pound and the dollar was also exactly equal to 1 pound for 4.87 US dollars. This then became the fixed exchange rate between the dollar and the pound under the gold standard system.

The same principle was used in determining the fixed exchange rates among all the other currencies issued by all the other “gold standard nations.” Under this arrangement, all the currencies had first to be converted into gold before being converted again in the other currency of choice. There was no reserve currency with gold being the only reserve requirement for all member states. As such, in the implementation of this system, each government had to have gold reserves and had committed itself to buying and selling gold at the legally stipulated weight and fixed prices/ exchange rates.

There were no institutions or written agreements / laws to enforce this fixed exchange rate system. Instead, the System was enforced through only one policy; converting one currency into gold and then back into another currency of choice. This was possible because gold was traded freely and the fact that each participating country had committed itself to buying and selling gold at the predetermined fixed prices.

This system did not operate as smoothly as earlier intended. As time passed, it became difficult for governments to sustain their gold reserves as gold became a scarce commodity and as such the fixed exchange rates had to constantly be adjusted upwards. Demand for gold became too high and the governments started to be more stringent. With the only rule being broken by the government’s refusal to sell gold freely, the system finally met its death with the advent of World War 1. After the war, some countries tried to revive the system to no avail. The major reason for this failure was the American Great depression of the 1930s.

Forex markets

Introduction

Forex market refers to a financial market where different world currencies are traded. The main aim of the forex market is that it wants to aid in the facilitation of international trade. Since the countries taking part in trade use different countries, then, a right exchange rate has to be determined before any trading takes price.

Forex market trading

In this case, the volume and nature of trading is usually determined by the exchange rate regime in place. The most effective way of analyzing this market could be on looking of variables such as international trade between countries in a floating exchange rate regime where forces of demand and supply are left to predict the equilibrium exchange rate between different currencies, trading will be more open and competitive. However, in the managed float or the pegged exchange rates regimes, the prices of various currencies are fixed and thus not much activity is expected in terms of bargaining trying to come out with the best price.

Market participants

Like in the common goods and financial markets, the forex market has both demanders (buyers and suppliers (sellers) of foreign currency in as much as government may control the exchange rates, majority of participants in the market are usually from the private sector. The demanders for foreign exchange may include  students travelling abroad for studies, individuals seeking medical care from abroad, investors seeking to purchase machinery and other raw materials e.t.c. on the other hand suppliers of foreign currency may include international tourists and visiting a country, exporters of commodities from a country locals living in the diaspora who would love to remit some of their incomes e.t.c. for their part, though illegal, money launders are considered to be very efficient demanders and suppliers of foreign currency.

Speculation in the forex markets.

Speculation is the process of taking two part offsetting positions in two markets such that the net return is only the expected returns. In this case risks and minimized in that excess profits in one market are offset by equally large losses in the other markets. Speculation as an activity is a very important aspect of the foreign exchange markets and due to the numerous numbers of speculators, they can be able to influence or determine the exchange rates of different currencies in the forex market. The speculation activities may also include hedge funds which in principle use the same principle in their day to day activities.

Advantages of forex markets over stock markets

In comparison forex markets trading are far more advantageous than stock markets such aspects include around the clock trading. In essence the forex markets are often 24 hours a day expect on weekends when it is closed for speculators, this proves a very enticing opportunity to take advantage of all the world markets simultaneously in order to make a killing. Also, in forex markets, no commissions are charge for trading. The system is set such that bidding takes place and once one has won by gaining extra cents, no charges whatsoever are deducted from their earnings. This proves to be very enticing to hardworking businessmen and women.

Conclusion

Forex markets are very essential in currency in currency conversion to allow for smooth sailing in international trade and if taken seriously, it can be a very profitable venture for whoever invests in it.

Foreign exchange rates

Introduction

This is the rate that is used to weigh the value of a currency in relation to how much of another currency it can buy or can be exchanged with. Foreign exchange rates of a currency to other international currencies mainly depends on the type of the exchange rate regime that has been adopted in the country and include the following.

Fixed exchange rate 

This is where the government through its policies fixes the rates at a given value and incase it rises or drops, the government interferes to buy international currencies through the central bank.

The main criticisms to this regime are;

o   It doesn’t automatically adjust the balance of trade  thus incase of a trade deficit the demand for foreign currency increases and this will lead to increased price of the foreign currency compared to the domestic currency.

o   The government must have to spend more resources piling up foreign currency so that incase the fixed rate changes they can afford to bring back the rate by buying more foreign currency.

Flexible exchange rates 

This is the regime where the rate of exchange depends on supply and demand .This is the most preferred exchange rate regime as it allows the economy to automatically adjust back to full employment  level with minimum government intervention.

Floating exchange rate 

This is the regime where the domestic currencies value depends on the foreign exchange market, such a currency is called a floating currency.

Linked exchange rate 

This is the regime where the domestic currency is linked with another currency. The government does not interfere with the foreign exchange market under this regime.   

Control of foreign exchange rates

A government may decide to control the rates to ensure that the citizens and other international financial institutions who may be interested in using the domestic currency for either imports or exports abide to the rules set by the government or by the central bank.

The government may decide to control the foreign exchange rates by: 

Practicing fixed exchange rates- By this the government ensures there is minimum contact between the citizens and foreign currencies as it’s the government who interferes directly with the exchange rate and not like that of a flexible exchange rate where the rate depends on demand and supply. 

Controlling amount of currency to be imported or exported- this assures the government that the amount of domestic currency outside the country is not in excess of what is required and that the amount of foreign currency in the country is not excessive thus it can hardly reach out to the general public. 

Restricting citizens from having foreign currencies- this is to ensure minimum access to foreign currencies by the citizens thus they cannot carry out any transaction using foreign currencies in the country. 

Controlling the use of foreign currency within the country-This is done by government policies, rules, and conditions that one must satisfy before handling foreign currencies in the country.

Conclusion

From the above illustrations we  realize that foreign exchange rate depends mostly on governments decisions and the type of exchange rate regime that has been adopted.

Foreign exchange brokers

Forex brokers are essentially individuals or firms that bring together buyers and sellers of foreign currency charging a commission fee or for their efforts. They charged commissions reflect the spread i.e.  The difference between the buying and selling price of a given pair of currencies. Through their role as intermediaries in the fore market, the brokers act as the entry point for both groups of individuals (buyers and sellers) into the forex market i.e. they are the platform through which transactions may be carried out.

The brokers may also provide online platforms for transactions on behalf the buyers and sellers of foreign exchange. In order for one to be considered an inline currency trader as well as a commodity trader they are expected to maintains an account with a broker. As such, the individual is classified in the category of individuals that trade in the forex markets for speculative purposes.  As a speculator, the main aim is to gain profits by taking advantages of market fluctuations.

The role of the broker entails ensuring that he/she executes the transactions requested on time on top of ensuring the client is thoroughly informed on the prices so as to facilitate implementation of well informed decisions by the client. Also, the broker should train the client on the usage of a plat form where in exists; basically how to trade on the forex markets using the particular platform. On top of this, the broker should provide the client with expectations of trading process and assist where the client may have problems in forex trading.

Due to the large number of forex brokers in the market, for the client to increase their chances to maximize their own welfare by choosing the best broker to help them along. Different brokers apply different methods in transacting business and as such the results yielded may be different. In order to be sure, the client may opt to use the re-known brokerage firms or individuals in town to save time and energy that may be required in studying all the potential candidates.  Usually, these large re-known firms have affiliations with banks and other financial institutions and as a consequence the client may easily acquire extra funds on the recommendation of the brokerage firm. The client should beware of brokers that do not have any physical addresses or may not be forthcoming in terms of their activities and associated returns.

With the evolution of the internet, development in the market was inevitable with the coming of online brokers in this case; the forex traders carry out the same functions as before only that they make use of the internet. As a client you don’t to necessarily meet them as all the transactions including can take place over the interment.

In conclusion, it is quite essential to note the process of transacting business may not be so transparent and as a consequence, the clients should be on the lookout for unscrupulous forex brokers who may cheat them out of their earning. The clients should not leave the whole process to the brokers without any supervision.

Exchange rate history

1800^th century

Back dating into the 18^th century, the earliest forms of forex markets can be traded for the gold standard use error. In this  period, gold was taken to be widely accepted form of exchange and as such for transaction to take place, the local currencies of the various  countries has to be converted into gold first their back into the other country. As a consequence, the Central Bank of all the participating had to have reserves of gold and be ready at any time to sell or buy gold from the traders. However, this system was not as smooth as anticipated  earlier due to the scarcity of gold and the convertibility of gold into the various currencies. Other methods had to be determined.

1914 – 1944

The use of the gold standard was suspended during World War I thus leading to the collapse of the forex market. However, at the end of the war, 1920, a few countries tried to revive the use of the gold standard to no avail due to the great depression of the 1930’s. As a result, the countries had to rethink their strategies in approaching the exchange rates market conundrum. Thus plans were put in place to revise the gold standard but were abandoned due to the inevitably of war in 1938. Any plans for a change in exchange rate had to be put on hold until the end of the second word war in 1944 since all international trade had been suspended during the period.

1944 – 1971

In the advent of the second world war, a meeting was held in Bretton Wood, USA where an agreement known as the Breton Wood Agreement  was that the USA  dollar was taken up to be the reserve currency and as such was used as the reference point for exchange rates with other currencies. All the other currencies had first to be converted into US dollar before being converted into another currency of choice. To make the process easier, the prices of all the other currencies against the dollar were unilaterally determined with 1% threshold movement of exchange rate below or abuse the fixed exchange rate. Any greater changes than the set 1% between the US dollar and other currencies had to be unanimously agreed upon by all the member states. Out of the resolution, a great burden of ensuring that there was enough supply of US dollar reserves was passed on the American government. As such, the country could not make any extreme changes in its policies that would affect other nations.

Another outcomes of the meeting was the formation of the Bretton Wood institutions, The World Bank, The GATT (World Trade Organization and the International Monetary Fund (IMF).

All these institutions were organized in streaming lining the market for smooth transactions between different countries. This system came to an end when the supply for US dollars exceeded the demand and as such a new agreement had to be put in place.

After 1971

An agreement was put in place to allow for exchange rates to be solely, determined by forces of demand and supply. As such the floating/flexible exchange rate regime was born. This was greatly hailed due to the fact that it was automatically attained. This system allows for greater levels of liquidity as well as automatically sorting out problems of balance of payments (BOP). However, the major problem associated with this system is the fact that it is susceptible to attacks by speculators making it practically impossible for business planning.

Exchange rate regimes

Introduction

The term exchange rate regime refers to the general operational principles applied in the forex market of a country. The regime usually manages the activities and ways the country administers its own local currency with respect to other world countries. There are numerous form of exchange rate requires though four are the most commonly used;

Flexible exchange rate requires

This is the most common exchange rate regime currently being used by most countries in the world. In this type of regime the forces of demand around supply are left to determine the equilibrium exchange rate without any interference from the central bank of a country. As a result of the independent movement of prices, the main advantage of this regime is that it helps in eliminating problems of balance of payments (BOP) especially deficits. However, due to the volatile nature of the market, it makes it practically impossible for business planning.

Fixed exchange rate regime

In this kind of regime, the prices of foreign currencies visa vice the local currency are usually determined by the central bank of Kenya of a country, taking into consideration other micro-economic variables in the country. As a result of the control from the central bank, the problems of volatility associated with the floating exchange rate require are eliminated. However, since the exchange rates are exogenously determined, the exchange rate can either be set above or below the equilibrium exchange rate. As a result there may be a deficit or a surplus of foreign currency thus bringing about problems and balance of payments.

Managed float exchange rate regime

In this kind of regime, the best attributes out the first two regimes (fixed and floating). As a result, we have a high breed sort of regime whereby, the volatile nature of the market due to the practice of the floating exchange rate regime are eliminated by central bank intervention in the short run only because it would not be sustainable to control the prices in the long run. However, a major downside to this regime is the fact that it would be impossible to tell where the changes in demand for foreign currency are either temporary or permanent.

Foreign exchange controlled exchange rate regime

In this case, the government controls who buys or sell foreign currency and at what price. This regime is mostly in use in countries with chronic balance of payment problems. This is a common case in the less developed countries where dictatorship regime most often set the exchange rate below the equilibrium exchange rate level. This usually represents a deficit in the demand for foreign currency that can not be sustained over time by the Central Bank. On the other hand, it would be a common case that most of the demand and supply of foreign exchange rotates within and around the government structures thus denying genuine businesses and investors opportunities to transact their projects. The excess deficit in foreign currency represents a deficit in the balance of payments on top of the fact that this would generally not be good for importers considering that majority of the raw materials in use in these countries are imported. This would most probably make the whole production process expensive thus making prices of goods to be relatively high.

European forex markets

Brief history

European trading block as a whole is the most active foreign exchange markets in the World and as a consequence play a key role in determining the terms of trade and other factors affecting international trade. In the late 1990s, the European block increased competition for foreign markets increasing importance of domestic demand for economic development leading to the elimination of trade barriers such as tariff the formation of a common market. Since the formation of the European Union (E.U) most of Europe has thrived with several markets emerging as power houses in foreign exchange.

Major European forex markets

Since the introduction of the euro as a common currency in the member countries in of the European Union, the currency has appreciated in value thus helping to boost various economies of member countries. Nearly a third of forex market trading activities take place in the morning as the European forex markets open. However, there are still major players within this pool that generally aid in sustaining the Euro. It should be noted that though Britain still uses its own currency, the exchange rate of sterling to Euro is essential to the welfare of the union. The major forex markets in Europe include; the London, Paris, and Berlin. These foreign exchange markets transact large volume s of business and are practically operational 24 hours a day.

 Exchange rates

Currently, there are only two major European currencies trading in the European and other world foreign exchange markets i.e. the British Sterling pound and the Euro. Due to the healthy competition between the two currencies, Europe has seen an influx of new business opportunities that come with having two of the major World currencies in the same continent. The exchange rates between the two currencies have been relatively stable over the years although there was a slight dip in the valuation of the Sterling pound in the recent past due to the 2009/2010 recession.

Role of European forex markets in international trade

Europe occupies the central role in international trade with majority of trade activities being between European nations and other nations from other continents. Trade majorly takes place using US dollars, the Sterling pound or the Euro. With two of these currencies hailing from Europe, any changes in the demand and supply of these currencies has a direct effect on the volume and quality of international trade. The exchange rate between the pound and the Euro, the pound and the pound and the dollar as well as the euro and the dollar must be stable/ constant for the operation of international trade. For buyers and sellers requiring pounds or Euros to complete their transactions in the international market, European foreign exchange markets become the best place to acquire these currencies.

Conclusion

A study of the European forex markets reveals an increased volume in the number of forex markets transactions. This not only reveals that Europe is an important market in the World currently but also reveals that I will become even more important in the future.

Exchange rate calculator

Introduction

An exchange rate calculator functions by applying money exchange rate to some amount given in one currency to avail the amount in the other currency. The calculator is used in the foreign exchange market which is divided into four regimes;
Fixed exchange rate- the calculator cannot be used in this regime because the government fixes the rate of exchange between the domestic currency and the foreign currency and interferes incase it drops or falls beyond the fixed rate of exchange just to maintain it thus it is always fixed.
Flexible exchange rate- The calculator can be used at this regime because the rate of exchange between the domestic and foreign currencies depends on demand and supply thus it is flexible and varies from time to time.
Floating exchange rate- this is the regime where the rate of exchange between the domestic currency and the foreign currency depends on the foreign exchange market, the calculator can also be applied in this regime because its not fixed and is capable of changing.
Linked exchange rates-this is a regime where the domestic currency is linked with another currency such that the value depends on the foreign currency in this regime a rates calculator can be used through calculating the value of the foreign currency.

It is mostly used by international businessmen and travelers to enable them know or determine the right time to carry out their transactions by taking advantage of the always changing currency rates of exchange in the international money market especially when they are favourable to them

Merits of using exchange rate calculator 

It’s far much faster because one  just needs to do some few clicks and the value is given compared to the traditional ways of calculating which are more tedious and consume a lot of time.
It assists a person to automatically convert one currency to another currency with no much manual work needed.
It is used to determine which one of the involved currencies is more valuable than the other so that it helps determine whether exchanging the currencies will be favourable by considering the rates of  interest.
It assists people entering into expensive transactions to wait for the right time to carry them out to avoid them from incurring   huge losses through high rates of exchange. 
The calculators are readily available on the internet hence one does not need to have it physically  for one to use it to use it thus it is readily available.

Demerits of using the exchange rate calculator 

Currency  fluctuations . Currency fluctuations takes place in a very short time that the rates of currency exchange might be low this time and they shoot up in five minutes in other words its unpredictable thus we cannot rely heavily on the calculators as the rates keep changing by time.
Inadequate e-commerce systems. Due to poor e-commerce systems some rate calculators are not kept up to date you may find a calculator using rates that were existing a month ago, this leads to misinformation about what is going on in the current exchange rate market thus sometimes people opt for manual rate calculations.

Conclusion

Exchange rate calculators are useful because they have more merits than demerits  and they are quite useful especially to international traders and tourists they are also fast and are also available on the web hence are readily available anywhere as long as there is an internet connection.

European currency analysis

Introduction

There are basically to major currencies operating within the Euro-zone; the British Sterling pound and the Euro. The Euro came into use after the formation of the European Union (E.U) and was adopted as legal tender by all member countries except Great Britain. All the other nations discarded use of their own currencies in favor of the Euro.

The euro

This is the official currency which is used by 17 members of the European Union which is made up of 27 countries but the ten countries do not use it like their official currency even though it’s still used within them.

The Euro-zone

Belgium,Finland,Germany,Italy,Portugal,Slovenia,Spain,Netherlands,Austria,Estonia,Greece,Cyprus,France,Ireland,Slovakia and Luxembourg. European Institutions also use this currency whose sign is (€) and is coded (EUR). The 17 countries where it is the official currency are referred to as the Euro-zone and the zones economy is the second in largeness in the world, the currency is the second most  used currency after the U.S dollar and it is also the second mostly held reserve currency in the world reserves. It is managed by the European central bank (ECB) which is based in Frankfurt, Germany, the  use of this currency has led to integration of the European countries  financially, socially and economically and sometimes lead to even converging of prices in all the countries but this does not happen on all products.

Characteristics of the Euro

The Euro is available in both coin form and bank notes form and the coin form is available in the following figure values €2,€1,50c,2oc,10c,5c, and 1c while the bank notes form is available in €500,€200,€100,€50,€20,€10, and €5

The pound

It is the official currency of the United Kingdom made of Britain, Wales, Ireland and  Scotland her overseas territories symbolized by (£) and coded (GBP), it’s the fourth most used currency in the world after the U.S dollar ($), Euro (€) and the Japanese Yen (¥). The British sterling pound is the third most held reserve currency in the world reserves after the U.S dollar and the euro. Even though the United Kingdom states are members of the European Union they opted to have the pound as their official currency.

The pound is managed by, Bank of England, Bank of Ireland, Bank of Scotland and Royal bank of Scotland

Characteristics of the pound

The currency exists in both coin form and bank notes form in the following figure values.

Coin forms: 50p, 20p, 10p, 5p, 2p, and 1p

Bank notes form: £1000, £500, £300, £20, £100, £50, £20, £10, and £5

There are other bank notes which are referred to as titans and they have a value of £100,000,000, titans are not accessible to the general public and they are only forty of them that do exist.

Conclusion

From the above illustrations we have been able to learn and compare the euro to the pound and we have also learnt about their jurisdictions which they can be used officially and where they are not official currencies we have also seen the forms they exist in and the figure values of existence.

Balance of payment (B.O.P)

Introduction

The term balance of payment refers to the statistical record of all economic transactions that have taken place during a given period, usually a year between a country’s residents and the rest of the World i.e. it is simply all payments and receipts of country’s international transactions of a given country.

Components of the B.O.P

The balance of payment contains three types of accounts that are used in the recording of all transactions. Each B.O.P component account has a debit and credit side; the debit side records all the payments or outflows out of a country while the credit side records all the receipts or inflows into the country. As a convention, the debit side items are recorded as negative (-) while the credit side items are recorded as positives (+). Inflows into the country include export earnings, money transfer or donations from abroad, inflows of foreign investments into the country etc. Outflows include imports, repatriated earnings of foreign investments, and money transfers by locals abroad. The three accounts are;

Current account

It is a record of all current inflows or receipts and outflows/ payments between a country’s residents and the rest of the world. The items recorded her include; unilateral/ money transfers, payments and receipts from the import and export sector, military transactions, incomes from old investments by both residents and foreigners etc. the sum of debits against credits gives the balance of the current account. If it so happens that the debit side exceeds the credit side thus giving a negative figure, then the balance of the current account is said to be a deficit. However, if the credits exceed the debits giving a positive figure, then the current account is said to be a surplus which is ideally favorable.

Capital account

It records all the lending and borrowing alongside all the purchases and sales of assets by individuals and government agencies. These assets may include treasury bills, government bonds company shares or even physical assets such as houses and land. Purchases of foreign assets by residents are recorded as debits while purchases of local assets by foreigners are recorded as credits. In this case as well the debits and credits are summed against each other giving either a surplus or a deficit balance of the capital account. A surplus is the favorable of the two.

Official settlements account

This records all the official transactions carried by government agencies, central bank and the treasury. The components of this account include, central bank’s gold holdings, county’s reserve holdings, foreign reserves of other foreign central banks held by the local central bank etc. interventions by the central bank in the foreign exchange market will also be recorded in this account. The official settlements account balance gives the net change in country’s stock of foreign reserves and also official government borrowing. The transactions on the official settlements account are used to compensate for any differences between the total payments and the total receipt/ payments of the current and capital accounts. As a consequence, the official settlements account balance is always the negative of the total sum the “items above the line” balance.

Balance of payments problems

What are balance of payments problems?

Balance of payments problems arise generally due to existence of deficits in the current and capital accounts. The transactions that are in the capital and current accounts as autonomous transactions or items above the line. They are known as such because the transactions are being undertaken either in foreign exchange market or the commodity market without the participants being aware of their actions the balance of payments effects e.g. when residents transfer money abroad either as investment material or donations/ gifts have no clue whatsoever of these balance of payments effects.

Causes of B.O.P problems

There are numerous factors that influence B.O.P problems in countries but the most common of these is the use of the fixed exchange rate regime. In this case the foreign exchange rate is usually se below the equilibrium exchange rate thus over valuing the local currency. As consequence, it becomes the imports will be cheap as compared to the exports. This means that the demand for imports will surpass that of exports bringing about a higher debit balance. Other causes of inflation may include; high inflation rates, level of economic growth, government borrowing habits, transfer money abroad, recession in other countries, deterioration of the current account etc.

Adjustment of B.O.P deficits

It is only under a freely floating/ flexible exchange rate regime that the equilibrium exchange rate is established, under the managed float and the fixed/ pegged exchange rate regimes, the exchange rate will be set either above or below the equilibrium level bringing about a surplus or a deficit in the balance of payments account. In this case we will only concentrate on the deficit side and how to adjust it. The various ways of adjusting the deficit balance include;

Use of expenditure reducing policies

These policies include the monetary and the fiscal policies. Adjustments in the items of these two components are what bring about changes in the deficit balances of the balance of payments account. The basic items used when using the monetary policies are interest rates and open market operations while when using fiscal policies the basic items are taxation and direct government expenditures.

Expenditure switching policies

These policies work by either increasing or reducing the relative prices of imports and exports. The main forms of these mechanisms are the exchange rate changes (devaluation of the currency) and also the direct controls to restrict imports. As a consequence, the consumers will be encouraged to switch from consumption of imported goods to consumption of domestically produced goods. This is because devaluation of the currency will make imports expensive to locals while at the same time making the exports cheaper to the foreigners. However, for this policy to work the Marshall-Lerner condition must be complied with i.e. for a devaluation to be effective in correcting a B.O.P deficit, the sum of elasticities of demand of the country’s exports/ imports must be greater than one.

Direct controls

This usually comes into play when the expenditure reducing and switching policies are not working or taking too long to bring about the desired change. However these controls interfere with free markets by distorting commodity prices and resource allocation besides being expensive to administer.

Determinants of currency exchange rates

Introduction

Exchange rates are influenced by a wide range of factors in the economy and the importance of each of these factors may vary from one country to another and generally over time. The exchange rate of a country’s level of economic performance. Exchange rates determine the trade activities of a country which is a critical aspect of the free market economy system. Numerous factors do affect the exchange rates in a country but there are only about four major factors.

Inflation rates differentials 

Generally countries with lower inflation rate differentials consistently usually exhibit a rise the value of the currency, as it value appreciates relative to other  world currencies looking at the statistics, countries with low inflation rate over the last decade or so, has exhibited appreciation in their currencies and such economic dominance in the free market system. Inflation rates have an effect of influencing the demand and supply of foreign currencies is high while demand for local, currencies is low. As such pressure in the market will cause depreciation in the local currency relative to the foreign currency.

Balance of payment deficits

When talking about the balance of payments in this case the area of general interest is the current account. Balance of payment. This usually represents the balance of cash inflows and outflows or simply transactions from trade between one country and others. A deficit in the balance of payments account usually represents an excess of cash outflows relative to cash inflows or simply transactions from trade between one country and others. A deficit in the balance of payments account usually represents an excess of cash outflows relative to cash in flows in a country i.e. payments exceed receipts and as a consequence it is required to borrows and to get grants from abroad in order to offset the deficit with capital account surpluses. In simple terms the country is acquiring less foreign currency from demand for foreign currency and thus lowering the value of the local currency. Therefore it’s evidenced that current account deficits do affect the exchange rate.

Terms of trade

Under the law of one price principle, one should be able to purchase commodities in different countries at the same price given that there is a floating exchange rate regime. Therefore an unfavourable increase in the prices of a country exports relative to the imports prices and demand, then, its currency value will decrease in relation to that of its trading partners.

Political stability and economic performance

For investors to put their money into a project in a specific country they have to take into consideration of pointers such as political stability and economic gains in that particular country. If a country such as most third world countries, is faced with political unrests, the investors are very unlikely to bring money into the country into terms of investments. This deprives of a country the much needed cash inflows that essential in affecting the balance of payments problems and subsequently reducing the demand for local currency. On the other hand, economic performance is a key pointer for investors to bring in their money. For a country performing well and interest rates being attractive, a lot of direct cash investment will be brought in. in this case, an increase in supply foreign currency