EXCHANGE RATES UNIT 26

DISCUSSION  You probably have at least one banknote in your pocket, wallet or purse. How much is it worth in other currencies? How do you know?  How is the value (the exchange rate) of the money in your pocket determined?  If you keep a banknote (e.g. a dollar) in your pocket, you know that it might be worth less after a few months. Why?  If you deposit it in a bank, of course, it will be worth a little more. Why?  Why do companies, institutions and people buy and sell currencies?  Has the value of your currency increased or decreased in the past few weeks or months? Why?

EXCHANGE RATES – VOCABULARY – MATCH THE WORDS FROM COLUMNS A AND B. FIXED OVERVALUED UNDERVALUED GOLD FLOATING FOREIGN MARKET SUPPLY & PURCHASING POWER EXCHANGE CONVERTIBLE SINGLE CURRENCY FUTURES COMMON DEMAND FLUCTUATIONS PARITY CURRENCY CONTRACTS CONVERTIBILITY FORCES ECXHANGE RATES

EXCHANGE RATES - VOCABULARY - VERBS ●Guarantee ●Fluctuate ●Intervene ●Peg against ●Determine ●Adjust ●Speculate ●Revalue ●Devalue ●Settle ●Appreciate ●Hedge against ●Convert ●Depreciate ●Establish ●Exchange ●Manage

READING – EXCHANGE RATES – MK, pp. 128 & 129 I Read the text and decide which paragraphs could be given the following headings: A Counteracting speculation B Gold convertibility C Market forces D Market interventions E Parity and speculation

READING – EXCHANGE RATES – MK, pp. 128 & 129 II MK, p. 129 – Write questions to which these could be the answers, according to the text. III VOCABULARY – Find words in the text that match the definitions in MK, p. 129.

SPEAKING – EXCHANGE RATES – MK, pp. 128 & 129 GROUP A GOLD CONVERTIBILITY  Between end of WWII and 1971 – exchange rates – fixed against – the US dollar – pegged against – gold  Fixed exchange rates – adjusted (revalued and devalued) – International Monetary Fund  Gold convertibility – ended in 1971 – inflation in the USA – the Federal Reserve – not enough gold – guarantee currency GROUP B MARKET FORCES  Gold convertibility – replaced – floating exchange rates  Floating exchange rate – supply and demand – foreign exhange markets  Buyers and sellers of currency – its price – rise – fall  Milton Freedman – exchange rates – settle at stable rates – economic realities – calculations of central banks – underestimated – speculation

SPEAKING – EXCHANGE RATES – MK, pp. 128 & 129 GROUP C PARITY AND SPECULATION  Purchasing power parity – cost of goods and services – different countries – inflation – currency depreciates  Financial institutions, companies and rich individuals – interest rates – short-term capital gains – currency appreciates  International trade and foreign travel – 5% of the world currency transactions – 95% purely speculative GROUP D COUNTERACTING SPECULATION  Exchange rate changes – problems for industry  Futures contracts – hedge against currency fluctuations  Forward planning difficult – price of imported raw materials and exported products – rise and fall – establishment of the euro, the common currency in much of Europe

SPEAKING – EXCHANGE RATES – MK, pp. 128 & 129 GROUP E MARKET INTERVENTIONS  Governments and central banks – change the value of currency – intervene – exchange markets – foreign currency reseves – buy and sell their own currency – ‘manage’ floating exchange rate  1992 – the Bank of England – protect the pound sterling – lost over £3 billion in a day – speculators – impossible to influence the floating exchange rate

EXCHANGE RATES - SUMMARY CHOOSE THE CORRECT OPTION. The value of a country’s A) money B) currency C) exchange rate is extremely important to all businesses engaged in international A) commerce B) stock market C) trade – imports and exports. For over a quarter of a century after the Second World War, most currencies were A) pegged B) measured C) exchanged against the US dollar, which in turn was fixed A) according to B) against C) in comparison the gold. Since the early 1970s, there has been a system of to A) floating B) flotation C) flotating exchange rates, largely A) fixed B) determined C) caused by supply and demand, which in theory reflect a country’s balance of A) accounts B) finance C) payments and a rate of A) devaluation B) depreciation C) inflation.

EXCHANGE RATES - SUMMARY In fact many currency movements seem to be influenced by A) investments B) speculation C) banks rather than underlying economic activity. Currency speculation in Europe was greatly reduced by the adoption of a A) usual B) common C) unique currency, the Euro, by twelve countries in Many economists defend the floating rate system and the necessity for a common European A) currency B) exchange rate C) bank.