...Abstract INTRODUCTION When first looking at an exchange rates, and foreign exchange, there are a few questions which must be considered. What factors affect the demand and supply of Australian dollars in the foreign exchange markets? Distinguish between the possible causes and effects of currency depreciation and a currency appreciation on the Australian economy. What forces have come into play, if any, in the past few years that have affected the value of the Australian dollar? In addition to looking further into those questions, it is helpful to know what the word Exchange Rate means; it is defined as, “The rate at which one unit of domestic currency is exchanged for a given amount of foreign currency.” A BRIEF HISTORY OF THE AUSTRALIAN DOLLAR Until 1971, the Australian dollar (AUD) was “pegged” to the British pound. This meant that the AUD rose or fell in line with the pound. In 1971, the AUD became pegged to the US dollar instead. These currencies were fixed currencies, which meant that the Australian currency would only change value when a major world currency also changed. This system lasted only until 1974 when the AUD became pegged to a trade-weighted selection of other currencies. This was still a fixed currency. In 1976 this selection of currencies became moveable. Small shifts were able to take place when needed. In 1983 the AUD became a floating currency. This means that the value of the dollar is determined by supply and demand. Initially, the Reserve...
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...The Australian Exchange Rate Abstract INTRODUCTION When first looking at an exchange rates, and foreign exchange, there are a few questions which must be considered. What factors affect the demand and supply of Australian dollars in the foreign exchange markets? Distinguish between the possible causes and effects of currency depreciation and a currency appreciation on the Australian economy. What forces have come into play, if any, in the past few years that have affected the value of the Australian dollar? In addition to looking further into those questions, it is helpful to know what the word Exchange Rate means; it is defined as, “The rate at which one unit of domestic currency is exchanged for a given amount of foreign currency.” A BRIEF HISTORY OF THE AUSTRALIAN DOLLAR Until 1971, the Australian dollar (AUD) was “pegged” to the British pound. This meant that the AUD rose or fell in line with the pound. In 1971, the AUD became pegged to the US dollar instead. These currencies were fixed currencies, which meant that the Australian currency would only change value when a major world currency also changed. This system lasted only until 1974 when the AUD became pegged to a trade-weighted selection of other currencies. This was still a fixed currency. In 1976 this selection of currencies became moveable. Small shifts were able to take place when needed. In 1983 the AUD became a floating currency. This means that the value of the dollar is determined by supply...
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...1. Why does a fall in the value of the Australian dollar against the U.S. dollar benefit Billabong? This is all part of the foreign exchange risk in doing international business. Future payments or distributions that are payable in foreign currency carry the risk that the foreign currency will depreciate in value before the foreign currency payment is received and is exchanged into US dollars. (Kelley, 2001) Billabong relied solely on the foreign exchange market. US had 50 percent of the company’s annual sales. When the US dollar gets stronger against the Australian dollar, their product becomes less expensive in the US. When the Australian dollar dropped $0.60 Australian/ $1 US “the Billabong’s products become less expensive in US dollars, and this drives sales forward”. (Hill, 2015, p. 319) Due to the anxiety many institutions sold Australian dollars, which ultimately drove down their value on foreign exchange markets. From the sales the US dollars were exchanged back into Australian dollars, the US dollar value increased “as the Australian dollar fell”. (Hill, 2015, p 319) When the Australian dollars lower, it makes exports more affordable to oversea buyers. In essence the low value of Australian dollar equals sales driving forward. 2. Could the rise in the value of the Australian dollar that occurred in 2009 have been predicted? As stated in the text (Hill, 2015) “what happens in the foreign exchange market can have a fundamental impact on the sales, profits...
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...money in a relatively low interest rate currency (funding currency) and effectively invests in a high interest rate currency by converting funds into the high interest currency and lending the amount to yield a higher return. We can show how the European Central Bank (ECB) to permanently increase the money supply will have a direct affect on the domestic Australian economy. This form of carry trade behavior will cause instability in the domestic exchange rate to which the Reserve Bank of Australia (RBA) can respond with an appropriate policy. BODY: * European Central Bank action To understand the full extent of the carry trade, we must appreciate the operations of the ECB in managing the money supply and effectively stimulating necessary changes to proceed with a carry trade strategy. The ECB having direct control of the money supply enables them to increase the money supply through looser monetary policy, for example. This is seen graphically in Figure 1 of appendix A [krugman, Obstfeld & Melitz, 2012]. From the graph we can see the Australian money market is initially at equilibrium at point 1 and the foreign exchange market at 1’, equating to an exchange 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...
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...ECON101 ESSAY -Foreign exchange -AE questions -Demand pull/Cost push Fiscal or Monitory policy - Money market (Demand/Supply) (Definition of Economics) Scarcity refers to the situation where resources (like labor and time) are limited but the wants are unlimited. (GDP) - GDP DEFINED GDP or gross domestic product is the market value of all final goods and services produced in a country in a given time period. - Final Goods and Services GDP is the value of the final goods and services produced. A final good (or service) is an item bought by its final user during a specified time period. Real GDP per capita = Real GDP/Population (Real GDP Fluctuations ) A business cycle is a periodic but irregular up-and-down movement of total production and other measures of economic activity. Every cycle has two phases: 1 Expansion 2 Recession and two turning points: 1 Peak 2 Trough (List 4) Factors not in GDP that influence the standard of living are * Household production * Underground economic activity * Health and life expectancy * Leisure time * Environmental quality * Political freedom and social justice (Fixed Prices and Expenditure Plans) Disposable income is either spent on consumption goods and services, C, or saved, S. That is, Yd = C + S (MARGINAL PROPENSITY TO CONSUME) It is calculated as the change in consumption expenditure, △C, divided by the change in disposable income, △Yd...
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...foreign exchange rates. In the case of Australia, what industries are vulnerable when the foreign exchange rate is high? Explain your answer fully. An exchange rate is the measure of value of one currency against another currency; for example, AUD $1 = USD $1.03 (indirect quotation). Exchange rates are dynamic in that they are changing throughout every trading day. Basically, fluctuation is caused by demand and supply of the currency. As in any market, price rises with shortages of supply and increases in demand. Price falls with reduced demand and increased supply. Figure 1.1 Demand curve The demand curve for Australian currency shows the quantity of Australian Dollar (AUD) that buyers are willing to purchase at each possible exchange rate. Demand arises from several sources * Exports – Foreigners who wish to buy Australian goods and services * Foreign tourists and international students in Australia * Australians firms borrowing abroad * Foreigners investing in Australia (capital inflow, e.g. assets, dividends etc) * Current transfers into Australia * Speculators who expect the value of AUD to rise The curve is downward sloping (Figure 1.1 – blue) since it is reasonable to expect that the cheaper the price of the local currency, the greater would be the demand for the currency by the rest of the world. Supply Curve (red) Supply curve for Australian currency shows the quantity of AUD supplied by Australian citizens at each possible exchange rate. Supply...
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...The Impact of Globalisation on the Australian Economy By Anthony Stokes Lecturer in Economics, Australian Catholic University Globalisation is not new. Australia has been involved in trade, investment, financial flows, technology transfers and the migration of labour since its foundation as a colony. What has changed is the size, direction and influence of these transfers, especially since 1980. There are a number of factors that have aided this transformation. They include: • The expansion of new markets – foreign exchange and capital markets are linked globally. They operate 24 hours a day with dealings any where in the world possible in real time. Financial deregulation and the floating of the Australian dollar since 1983 intensified the impact of globalisation on the Australian economy. • New technology and the tools of globalisation – the internet, email, mobile phones, media and communication networks have all sped up the process of globalisation. They have increased the spread and speed of knowledge transfer and communication. Australian consumers can buy products from any nation in the world, transfer funds between accounts or purchase shares in any major market. Australian businesses can market their products at a fraction of the cost and be exposed to a global market place of competition. This potentially is the closest we will ever come to the perfect market. • New institutional players – The World Trade Organisation (WTO) has growing authority...
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...Essay Four (Exchange Rates): Topic 2 – Australia in the global Economy Outline the causes of a decrease in demand for the Australian dollar, and discuss the impacts on the Australian economy of a sustained depreciation of the Australian currency. The exchange rate is a measure of the value of a currency relative to another and is influenced by the demand and supply of the Australian Dollar (AUD). Changes in any of the factors that affect supply and demand causes the AUD to rise or fall. The demand for the AUD is derived from the demand of Australia’s goods, services and assets, which is impacted by domestic and international economic conditions. Therefore, factors such as decreased capital inflow from investors, decreased demand for Australian exports and speculation that the AUD will fall are the predominant causes of the decrease in demand of the Australian dollar. This decrease in demand has resulted in a sustained depreciation of the Australian currency that has resulted in various positive and negative implications for the Australian economy. Capital inflow impact the exchange rate as foreign investors wanting to invest in Australia must exchange their own currency for Australian dollars therefore impacting the demand for Australian currency. The level of Australian interest rates relative to overseas interest rates may influence their investment decisions. Recently the interest rate has fallen from 3.75% in May 2013 to 2.25% in April 2015, causing a decrease in...
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...Financial Analysis: Billabong International Limited - Australia A paper submitted to Webber International University In partial fulfillment for the Master’s in Business Administration International Business By: Patrick L. Date: July 11, 2012 Course: MBA 6811 Semester: 2012 Instructor: Eberle Table of Contents Introduction 3 Country Factors & Monitoring Central Bank Intervention 4 Foreign Exchange Market & Movements in Currency 5 Currency Futures & Options 7 Arbitrage Opportunities & IFE 8 Monitoring Exchange Rate Trends & Risk 9 Direct Foreign Investment 11 Capital Budgeting 12 Corporate Governance & Country Risk Analysis 14 Capital Structure 15 Long-Term International Financing 17 Financing International Trade 19 Short-Term International Financing & Managing Cash Internationally 20 Current Events 21 Conclusion & SWOT Analysis 22 References 24 Introduction Billabong International Limited (BBL) is an Australia based listed company headquartered at Burleigh Heads in Queensland, Australia. The main business activities of the company are related to marketing, distribution, wholesale and retail of wetsuits, clothing, eye wears, hardboards for board games and accessories concerned with the season of snow fall, surfing and skating. Billabong’s products are being sold through...
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...stimulus is ineffective in a floating exchange-rate regime. It underlines this by comparing Australia’s experiences in the East Asian Crisis of 1997 and the GFC of 2008–09. It concludes that a depreciating exchange rate protected the Australian economy in the 1997 crisis, but was prevented from doing so in the 2008–09 crisis by the fiscal stimulus. Theoretical Underpinnings The Mundell-Fleming model (Mundell 1963) throws light on the relative effectiveness of monetary and fiscal policy under different exchange-rate regimes. Here we will consider a very simple example of their results. We assume that capital is internationally mobile. Under this condition, the following relationship (called uncovered interest-rate parity) will be satisfied: RA = RO + e* where RA = the Australian interest rate. RO = the interest rate in a specific foreign currency and for the same term. e* = the expected depreciation of the Australian dollar against the specified currency in the period concerned. Capital flows will ensure that this relationship is satisfied. For example, if RO + e* is greater than RA, funds will flow out of Australia to take advantage of the perceived higher expected return overseas. This will cause either: an increase in RA; or a fall in the value of the Australian dollar which will reduce e*. Consider the effectiveness of monetary and fiscal policy under different exchange-rate regimes. Fixed exchange rate: Assume that the authorities increase RA...
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..................................................................................................................................... 1 1.0 Sizable exposure to the foreign exchange risk .............................................................................. 1 2.0 Types of exposure ............................................................................................................................ 1 2.1 Capital Adequacy ........................................................................................................................ 2 2.2 Cash flow ...................................................................................................................................... 2 2.3 Fair value & income statement .................................................................................................. 3 2.4 Net investment in foreign operations ......................................................................................... 3 2.5 Translation exposure................................................................................................................... 3 Question 2 ............................................................................................................................................... 3 3.0 Policies of managing foreign currency exchange rate risk .......................................................... 3 3.1 Holding and issuing derivative financial instruments .................................................
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...the foreign exchange market of Australian dollars: (a) an Australian tourist in Europe: = supplier of AUD (b) a Japanese firm exporting to Australia = supplier of AUD (c) a U.K. investor who wants to buy Australian stocks = = demander of AUD (d) a U.K. tourist in Australia = demander of AUD (e) a German firm importing from Australia = demander of AUD (f) an Australian investor who wants to buy real estate in America = supplier of AUD 2. Explain whether each of the following changes would tend to appreciate or depreciate the Australian dollar, using supply and demand curves for the foreign exchange market to illustrate your answers: (a) higher interest rates in Japan Japan is reducing the supply of Japanese YEN depreciate the AUD in comparison to the YEN. (b) faster economic growth in Japan Appreciate the AUD in comparison to the YEN as the Japanese will have more money to spend on Australian goods (c) a lower rate of inflation in Australia relative to other countries Appreciate the AUD relative to other countries (d) a tight U.S monetary policy Depreciate the AUD in comparison to the US dollar (e) a tight monetary policy in Australia Appreciate the AUD in comparison to other countries f) an expansionary fiscal policy in Australia If the government increased spending this may put pressure on increasing interest rates relative to other countries appreciating the AUD. In a flexible exchange rate regime, analyse...
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...in Australia is under fierce competition, and the industry revenue is expected to grow at an annualized 2.2% in the next few years, to reach $98.1 billion (IBIS 2016). A growing number of discounters have infiltrated the industry, such as ALDI, which has forced two dominated companies, Woolworths and Coles, to lower prices and increase the number of private-label products (IBIS 2016). Malaysia hypermarket retail chain Giant is also eyeing the Australian market. Given the business context in Australia, political, economic and technological are the most relevant macro environmental factors that Giant should consider. Political factor The export tariff is an important issue in trading as Australia was Malaysia’s 10th largest export destination, accounting for 3.6 percent of Malaysia’s exports (Department of the Prime Minister and Cabinet 2012). The Malaysia-Australia Free Trade Agreement (MAFTA), was signed in May 2012 and came into force on 1 January 2013, provided a high level of market access liberalization for goods into the Australian market (Department of the Prime Minister and Cabinet 2012). The implement of MAFTA is likely to lower the cost of Malaysian products, enhance the relationship between trading partners and create investment opportunities and jobs in Australia market. Furthermore, according to the report of the Economist Intelligence Unit, Australia achieved one of the highest rankings in the world regarding political stability and strong government support for...
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...Arguments against flexible exchange rates include the arguments that they cause uncertainty, they inhibit international trade and that they allow destabilizing speculation. Arguments against fixed rates include that they cause uncertainty, they inhibit international trade and they allow destabilizing speculation. Contrast the situation in one country with a fixed exchange rate with one country that has a floating rate and explain the impact of the fixed and floating rates. Introduction Prior to 1970, fixed, or say pegged exchange rate regime was adopted by almost all countries worldwide. Afterwards, some countries have gradually made the transition from fixed to flexible exchange rates, which allow currency to float freely. In the following section, the definition of both fixed and flexible exchange rates will be introduced. Thereafter, the situation in Australia, which floating exchange rate regime will be compared with that of in Hong Kong, which uses fixed exchange rate regime. Moreover, the impact of different exchange rate regimes on economic entities will be discussed. Types of exchange rate Fixed/Pegged exchange rate A fixed exchange rate is usually pegged the value of a currency to a strong foreign currency such as US dollar or Euro (Hunt and Terry, 2011). This kind of rates is sets and maintained by the local government (e.g. central bank). In order to maintain a stable rate, the government trades its own currency on the foreign exchange market in return for the...
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...portfolios An Australian bank has long positions of 1 million US dollars and 1 million Swiss Francs. The closing exchange rates yesterday were AU$1.5/US$ and AU$1/SWF. The historical average value of daily exchange rate return is zero for both AU$/US$ and AU$/SWF. The standard deviations of daily exchange rate return for AU$/US$ and AU$/SWF are 50 basis points and 100 basis points respectively. The historical correlation between the two exchange rate returns is 0.5. a) If the daily exchange rate returns for both AU$/US$ and AU$/SWF follow a normal distribution and independent across dates (i.e., the serial correlation in daily exchange rate returns is zero), what is 10-day VaR for the bank’s aggregate holdings of two currencies? b) Assume for this question that the daily exchange rate returns for AU$/SWF do not follow a normal distribution and not independent across dates either. Based on the historical data, there is typically 5% of chance that SWF will depreciate by more than 150 basis points relative to AU$ in 10 days, and there is also 5% of chance that SWF will appreciate by more than 100 basis points relative to AU$ in 10 days. What is 10-day VaR for the bank’s SWF position? 2. Foreign exchange risk a) OZ Bank issues a one-year Australian certificate of deposit to finance a US$1 million investment in one-year fixed rate U.S. bonds. The interest rate of AU$ CD is 5% per annum. and the yield to maturity of the US bond is 10% per annum. Currently, spot exchange rates...
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