Chaos In The Currency Markets : Currency Crisis Of The EMS :: essays research papers

Chaos in The Currency Markets Currency Crisis of The EMS1. What does the crisis of kinsfolk 1992 carve up you about the relative abilitiesof gold markets and topic brasss to influence supplant rambles?The currency markets and national governments both have abilities toinfluence veer rates. Like a nonher(prenominal) financial markets, foreign exchange markets match to any news that may have a future effect. Speculators ar the part of thecurrency markets that take currency positions based on anticipated provoke ratemovements in various countries. Day-to-day speculation on future exchange ratemovements is commonly impelled by signals of future interest rate movements. Byusing the signal, speculators usually take the position before the thingsactually occurred. Sometime, if high power enough, the speculators position undersurfaceinfluence the exchange rate movement. The government controls is one of thefactors affecting exchange rate. The government can influence the equi libriumexchange rate in umteen way, including direct intervening (buying and sellingcurrencies) in the foreign exchange markets and indirect intervening byaffecting macro variables such as interest rates.2. What does the crisis of September 1992 tell you about the weakness of ameliorateexchange rate regimes?From European currency crisis of September 1992, it shows us that there atomic number 18 weakness of the fixed exchange rate system. When exchange rate are tied, ahigh interest rate in one country has a strong influence on interest rates inthe new(prenominal) countries. Funds will flow to the country with a more attractiveinterest rate, which reduces the supply of fund in the other countries andplaces upward pressure on their interest rates. The flow of fund would continueuntil the interest rate differential has been eliminated or reduced. Thisprocess would not inevitably apply to countries outside ERM that do not in thefixed exchange rate system, because the exchange rate ri sk may discourage theflow of funds to the countries with relatively high interest rate. However,since the ERM requires of import banks to maintain the exchange rates betweencurrencies within specified boundaries, investors moving funds among theparticipating European countries are less aided about exchange rate risk.3. Assess the impact of the events of September 1992 on the EU s ability toestablish a common currency by 1999.A major concern of a common currency is based on the concept of a singleEuropean monetary policy. to each one countrys government may prefer to follow out itsown monetary policy. It would have to adapt to a system in which it had onlypartial input to the European monetary policy that would be enforced in allEuropean countries, including its own.Chaos In The Currency Markets Currency Crisis Of The EMS essays research papers Chaos in The Currency Markets Currency Crisis of The EMS1. What does the crisis of September 1992 tell you about the relative abili tiesof currency markets and national governments to influence exchange rates?The currency markets and national governments both have abilities toinfluence exchange rates. Like other financial markets, foreign exchange marketsreact to any news that may have a future effect. Speculators are the part of thecurrency markets that take currency positions based on anticipated interest ratemovements in various countries. Day-to-day speculation on future exchange ratemovements is commonly driven by signals of future interest rate movements. Byusing the signal, speculators usually take the position before the thingsactually occurred. Sometime, if high power enough, the speculators position caninfluence the exchange rate movement. The government controls is one of thefactors affecting exchange rate. The government can influence the equilibriumexchange rate in many way, including direct intervening (buying and sellingcurrencies) in the foreign exchange markets and indirect intervening byaffecti ng macro variables such as interest rates.2. What does the crisis of September 1992 tell you about the weakness of fixedexchange rate regimes?From European currency crisis of September 1992, it shows us that thereare weakness of the fixed exchange rate system. When exchange rate are tied, ahigh interest rate in one country has a strong influence on interest rates inthe other countries. Funds will flow to the country with a more attractiveinterest rate, which reduces the supply of fund in the other countries andplaces upward pressure on their interest rates. The flow of fund would continueuntil the interest rate differential has been eliminated or reduced. Thisprocess would not necessarily apply to countries outside ERM that do not in thefixed exchange rate system, because the exchange rate risk may discourage theflow of funds to the countries with relatively high interest rate. However,since the ERM requires central banks to maintain the exchange rates betweencurrencies within speci fied boundaries, investors moving funds among theparticipating European countries are less concerned about exchange rate risk.3. Assess the impact of the events of September 1992 on the EU s ability toestablish a common currency by 1999.A major concern of a common currency is based on the concept of a singleEuropean monetary policy. Each countrys government may prefer to implement itsown monetary policy. It would have to adapt to a system in which it had onlypartial input to the European monetary policy that would be implemented in allEuropean countries, including its own.