Banking & Finance: Currency Fluctuations

Paper Info
Page count 7
Word count 2112
Read time 8 min
Subject Economics
Type Essay
Language 🇺🇸 US

Research strategy

The research strategy involves gaining an understanding of problems and applying materials and design expertise to provide solutions. Whilst this approach has been extremely successful and will remain a primary route for product development, increasingly seeking solutions based on active repair where stimulus can enhance or accelerate the process of understanding, and solving the related matters.

Research question

When obtaining an income-maximizing price approach in a market, possible modifications in local currency have to be regarded. It is known that swap rate changes cause dissimilarities in export and import values. However frequent researches find that the consequence of currency fluctuations diminishes towards the final customer price or even becomes immaterial. Some authors even emphasize the fact that one main component that drives the collision of notes difference on price and margin is given by the channel duration. This involves that exogenous cost shocks originated by the exchange rate changes are passed through incorrectly to final customer prices.

Obviously, a change in cost that is partly passed through guides to modifications in margins. It is consequently supposed that the margins of all performers involved in the division process will be twisted differently by exchange rate difference.

Following normal experiential trade theory, ERPT is usually defined as the extent to which exporters pass along replace rate-induced margin augments (reduces) by lowering (raising) prices in export market money conditions. To gain an imminent into the market instruments for a characteristic customer good, we use a micro econometric structure that includes three diverse players in the sharing procedure: manufacturer, wholesaler and retailer.. Given the judgment results, we calculate ERPT coefficients for various exchange rate changes by making counterfactual researches.

Literature Review

Impacts of Currency Fluctuations on Financial Sectors

Since currency values are calculated relative to other currencies, all currencies are found to be at risk of currency variation and the currency crisis that frequently go together with essential changes in currency value. Many countries in current history have faced these troubles, currency fluctuations that have distressed their nations’ economies. Examples are Argentina, Mexico, Russia, and Thailand. (Spiers 2001 p.15)

As the globe’s economy becomes more and more globalized with organizations increasingly doing business in other different countries, currency fluctuations become gradually influential in the day-to-day business activity. With this globalized economy, the issue arises; do we need a single currency? The idea of a global currency replacing the other currencies has become a continual idea for long. The Economists have theorized and postulated writing documents and holding meetings on the feasibility, advantages, and disadvantages of a single currency. Various steps have been in use towards that goal, mostly in Europe where the European Union uses Euro.

Focusing at the progress of the Euro, fluctuating against the dollar to where it is now, one notices the power in the Euro and the economic drive it has given to European nations with previously weak currencies. (Thiesin, 2007, P. 78)

Currency fluctuation has caused panic in different sectors including the financial sectors. Affects the business carried across the boarders of a nation, it affects people traveling to a foreign country. Most nations use a method of managed floating trade rates. Both supply and demand factors set the exchange rates mostly, as worldwide banks, business people, tourists, consumers, and multinational organization buy and sell foreign currencies and commodities. Governments normally only intercede to suppress great variation in exchange rates. (Jonston, Beaton 1998 p. 94)

The quest for a particular currency is determined by various factors, including inflation, interest rates, political situation and overall economic, monetary policies, and speculation. For example, the U.S. currency does not shift evenly against different currencies. currency fluactaution have a direct impact to the financial sectors. the impact may be negative or negative. curency fluctuatuon might scare away the potentail investots of a nation. Lack of investment will lead to decline in macro-economic climate which leads to a weaker currency that affects the financial institutions.( Bestany and Sagar,2004, P. 76)

Following the international financial crises at the end of the 1990s, financial stability has become a centre point for both financial market participants and national and international authorities. Accordingly, the demand for recent and accurate information, analyses and studies on financial stability has increased greatly. This demand has been met by national supervisory authorities, including government banks, through regular reports containing essenntial information about the all financial system in their states.( Gulde A. M. 2004 p.81)

For different reasons, currency appreciation is now being looked as way of controlling inflation by country governments and their banks. For example, the India’s Reserve Bank allowed their currency to gain value as a tool combat inflation, and since then, the currency has strengthened by a higher percentage. (Thiesin, 2007, P. 88)

Since currency can have a huge impact on returns, business need to know how it is managed in the target you are considering. Comparing funds that use different approaches to managing currency exposure can produce an “apples to oranges” comparison. Performance of a foreign investment and its currency are generally unrelated, it is important that these risks be managed separately. This is a different reason why it is important to bear in mind if the mutual fund you are contemplating about purchasing has a policy in place to manage currency exposure. (Thiesin, 2007, P. 66)

The good thing is that currency variance has been noticed to have very little impact on accumulation market income over longer periods. The changes of exchange rates tend to even out over time. Nevertheless, from time to time, currency trends can be significant, creation investing in overseas currencies an even more essential reflection for investors with minor horizons. Currency changes can also provide investment opportunities.

For illustration, a strong Canadian dollar compared to the U.S. dollar means that U.S. companies and funds can be highly demanded in fact. This means that it takes fewer amounts to buy them. With dollar remaining strong, and the breadth of opportunities that exist in universal markets, other countries have a brilliant opportunity to expand their portfolios by totaling up luxury foreign assets at more reasonable prices. (Thiesin, 2007, P. 98)

Countries enter into foreign exchange frontward contracts to reduce the short-term shock of foreign currency variances on receivables, savings, and payables, mainly controlled in Australian, Canadian, Japanese, and other European currencies, including the euro and British pound. Market risks linked to foreign receivables, investments, and yet to be paid bills relate major to variances from the forecasted foreign currency balances and accountings. ( Spiers 2001 p.21).

An estimated three-quarter of prominent companies in the world operating expenses are U.S.-dollar denominated. In order to reduce variability in operating expenses caused by the remaining non-U.S.-dollar-denominated operating expenses, they occasionally hedge certain unknown currency forecasted dealings with currency options with maturities up to about eighteen months. These equivocation programs are not designed to provide foreign currency shelter over wider time horizons.

While setting a specific approach, they go for factors which ay includes offsetting exposures, significance of exposures, costs related to entering into a given evade instrument, and potential usefulness of the hedge. The profits and losses of foreign barter contracts ease the variability in operating everyday expenditure associated with currency fluctuations. Due to limited currency exposure hitherto, the effect of foreign currency fluctuations has not been material to the Consolidated Financial Statements. (Spiers 2001 p.14).

If currencies are globalized, much harm related to currency deal will be avoided. The billions of money exhausted in efforts to uphold currency values and cover individual riches is not affected by currency fluctuations would mostly be saved. Local money crisis would not be possible, as the international economy would hold just one currency, keeping it buoyant even with regional and local harms. With a single currency, no longer will a state falter due to valueless of its currency.

The shortage of ways used to shield a nation from currency fluctuations; assets of foreign stocks or bonds would no longer be necessary. In addition, with increasing cross-border trade, there would no longer be a call for to watch currency prices to guarantee manufacturing costs stay stable. In summary, a single currency would bring stability to a very unstable sector of the financial market. (Thiesin, 2007, P. 108)

European countries are critical on the currency issue and placed it firmly on the table at the Group of ten gathering, even toughening their talking. On the other hand, France and Germany have shown fears that the soaring sole currency would harm the euro zone’s economic revival, which depends a lot on exports.( The New York Times, 2008)

More people argue that, if the euro can be used successfully by thirteen states, soon to be fifteen, and later twenty two nations, why not be accepted as a currency to be used by the one hundred and ninty one members of the United Nations ( UN) for international transactions and for local transactions such as the tax payment. Led by the example of European nations, regional monetary unions are being created and encouraged across the world. a possibility is a North American monetary Union, but that will not take place unless the U.S. Federal Reserve is willing to include the Canadians and Mexicans at the monetary policy making decision table tables – and this will happen when the treasury of the US dollar see that they need ollaborators in order to mitigate or slow down the pre-eminence of the euro. ((Jonston, Beaton 1998 p. 105)

The implementation of a sole world Currency will save the world huge sum of money close to 400 billion dollars in foreign exchange trade costs, and will mitigate currency crisis and balance of payment (BOP) problems and eliminate all the currency fluctuations, which endanger our globalizing world. In addition, a single Currency would increase the values of assets in countries where currency variance is currently high, and the citizens of those countries would be less likely to transfer their money to safer financial centers. The aim of the single global currency assignment. is a single worldl currency by the year 2024, which is only few years away (Gulde A. M. 2004 p.102)

Although it may be argued that many regular people may want a stronger currency, due to the inflated exchange power, there are many profit brought on by a weaker dollar. For domestic sell abroad organizations, a depreciated dollar can help to improve the competitiveness of American locally made products. For blue chip multinationals who may conduct a big part of their transactions abroad, their Euros, or British pounds become more valuable when converted back to US dollars. The change comes to the aid of yardstick companies like Coca Cola and IBM, both listed on the Dow Jones Industrial Average. (Gulde A. M. 2004 p.54)

On the other side, foreign companies in Canada, Europe and the UK on are feeling the touch of a lower dollar as the value of bigger contracts with manufacturer suffer when they are translated into the local currency. Majority of the foreign institutions that transact business with the US have their contracts translated to dollars. If the dollar depreciates, the amount that they translate back to their currency is smaller as well. With greater earnings estimation based upon a greater dollar exchange rate, lower outcome, or net income has become the norm (Jonston, Beaton 1998 p.141)

A forward agreement allows an organisation to set the exact exchange rate it will pay during a contract, even if this contract is to be completed in the future. The value tag to the user is zero; the bank agrees to get on all the currency variation risk complication in the deal. Approving a forward agreement removes any possible gain from the currency oscillation for the exporter. However, scholars argue that in the immense majority of situations, it is healthier for the exporter to capture a stride back.

Another method, that might protect importers and exporters from currency oscillation, is the currency option. This is almost similar to a forward contract discussed earlier, only that the customer at this time pays a given fee to give them the chance to take merit of any conducive progress in the exchange rate. Both the currency option and the forward contract are available in nearly every traded currency, and work equally well whether a company is primarily an importer, exporter, or both. Knowing in prior how much you are going to receive in any business deal is a fundamental to most businesses; hence the popularity of the forward contract. (Johnston, Beaten 1998 p.201)

In summary, currency fluctuation poses effect to a states economy. A state should improvise a technique whereby currency fluctuation will not affect the economy or the business sector negatively.


Bernard B. (2007) The Secrets of Economic Indicators: Hiden Clues to Future Economic, Wharton School Publishing, ISBN 0132447290.

Bestany R, Sagar A(2004) The local currency financing revolution.

Dermot Corrigan Protect against currency fluctuation Sunday. 2006. Web.

Gulde A. M. (2004) Financial Stability in Dolarrised E economies, international monetary fund, ISBN1589062965.

Johnston S, Beaton H. (1998) Foundations of International Marketing, Thomson Learning MEA ISBN186152142.

Linda Thiesin (2007) financing planning. RBC, Canada.

Spiers J. W. (2001) How small business trades worldwide John Spiers C ompany ISBN 0979551501. Web.

The New York Times. 2008. Web.

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EduRaven. (2021, November 4). Banking & Finance: Currency Fluctuations. Retrieved from


EduRaven. (2021, November 4). Banking & Finance: Currency Fluctuations.

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"Banking & Finance: Currency Fluctuations." EduRaven, 4 Nov. 2021,


EduRaven. (2021) 'Banking & Finance: Currency Fluctuations'. 4 November.


EduRaven. 2021. "Banking & Finance: Currency Fluctuations." November 4, 2021.

1. EduRaven. "Banking & Finance: Currency Fluctuations." November 4, 2021.


EduRaven. "Banking & Finance: Currency Fluctuations." November 4, 2021.


EduRaven. 2021. "Banking & Finance: Currency Fluctuations." November 4, 2021.

1. EduRaven. "Banking & Finance: Currency Fluctuations." November 4, 2021.


EduRaven. "Banking & Finance: Currency Fluctuations." November 4, 2021.