Currency basket, systems of exchange rate, technical

analysis

Katarína Koncošová

Currency

Is a generally accepted form of money,including coins and paper notes, which isissued by a government and circulatedwithin an economy. Used as a medium ofexchange for goods and services, currencyis the basis for trade.

Generally speaking , each country has itsown currency. For example, Switzerland´sofficial currency is the Swiss franc, andJapan´s official currency is the yen. Anexception would be the euro, which is usedas the currency for several Europeancountries.

Currency basketDefinitionA group of securities whose weightedaverage is used to determine the value of anobligation or the value of another country.For instance, a country that does not pegthe value of its currency to a single other currency,such as the U.S. dollar, could value its currency tothe value of a currency basket comprised of Euros,U.S. dollars, and Japanese Yen.

A select group of currencies whoseweighted average is used as a measure ofthe value or the amount of an obligation. Acurrency basket functions are a benchmarkfor regional currency movements – itscomposition and weighting depends on itspurpose.

A currency basket is commonly used incontracts as a way of avoiding ( minimizing)the risk of currency fluctuations. TheEuropean Currency Unit ( which wasreplaced by the euro) and the AsianCurrency Unit are examples of currencybasket.

Currency swap

A swap that involves the exchange ofprincipal and interest in one currency for thesame in another currency. It is considered tobe a foreign exchange transaction and is notrequired by law to be shown on the balancesheet.

Exchange rate

An exchange rate is the rate at which onecurrency can be exchanged for another. Inother words, it is value of another country´scurrency compared to that of your own.

System ´s of exchange rate:

• Fixed exchange rate• Floating exchange rate

Fixed Exchange Rate System• Rate that government ( CB) sets and maintains

as the official exchange rate. • A set price will be determined against a major

world currency ( usually the U.S. dollar, but also other major world currencies such as the euro , the yen or the basket of currencies). In order to maintain the local exchange rate, the central bank buys and sells its own currency in the foreign exchange market in return for the currency to which is pegged

Advantages of a fixed exchange rate

• Elimination of exchange rate risk, which can greatly enhance international trade and investment

• It imposes on a country´s monetary authority

Reserve Currency StandardIn a reserve currency system, another country’s currencytakes the role that gold played in a gold standard. In otherwords a country fixes its own currency value to a unit ofanother country’s currency.In the gold standard the central bank held gold to exchangefor its own currency, with a reserve currency standard itmust hold a stock of the reserve currency. Always, thereserve currency is the currency to which the country fixes.A reserve currency standard is the typical method for fixinga currency today. Most countries that fix its exchange ratewill fix to a currency that either is prominently used ininternational transactions or is the currency of a majortrading partner.

For example, suppose Britain decided to fixits currency to the dollar at the exchangerate E$/£ = 1.50. To maintain this fixedexchange rate, the Bank of England wouldstand ready to exchange pounds for dollars(or dollars for pounds) upon demand at thespecified exchange rate. To accomplish this,the Bank of England would need to holddollars on reserve in case there was everany excess demand for dollars in exchangefor pounds on the FOREX.

Other Fixed Exchange Rate Variations

• Basket-of-Currencies - Countries that have several important trading partners, or who fear that one currency may be too volatile over an extended period of time, have chosen to fix their currency to a basket of several other currencies. This means fixing to a weighted average of several currencies.

Example of a composite currency is found in the SDR. SDR stands for special drawing rights. It is a composite currency created by the International Monetary Fund (IMF). One SDR currently consists of a fixed quantity of US dollars, Euros, Japanese yen, and British pounds.

Crawling PegsA crawling peg refers to a system in which a country fixesits exchange rate, but also changes the fixed rate atperiodic or regular intervals. Central bank interventions inthe FOREX may occur to maintain the temporary fixed rate.However, central banks can avoid interventions and savereserves by adjusting the fixed rate instead. Since crawlingpegs are adjusted gradually, they can help eliminate someexchange rate volatility without fully constraining the centralbank with a fixed rate.

Pegged Within a Band

In this system a country specifies a centralexchange rate together with a percentageallowable deviation, expressed as plus orminus some percentage.

Currency BoardsA currency board is a legislated method to provide greaterassurances that an exchange rate fixed to a reservecurrency will indeed remain fixed. In this system thegovernment requires that domestic currency is alwaysexchangeable for the specific reserve at the fixed exchangerate. The central bank authorities are stripped of alldiscretion in the FOREX interventions in this system. As aresult they must maintain sufficient foreign reserves to keepthe system intact.

Dollarization/EuroizationThe most extreme and convincing method for a country tofix its exchange rate is to give up one’s national currency and adopt thecurrency of another country. In creating the Euro-zone among 12 of theEuropean Union countries, these European nations have given up theirown national currencies and have adopted the currency issued by theEuropean Central Bank. This is a case of Euroization. Since all 12countries now share the Euro as a common currency, their exchangerates are effectively fixed to each other at a 1-1 ratio. As other

countriesin the EU join the common currency, they too will be forever fixing theirexchange rate to the Euro. (Note however, that although all countrieswho use the Euro are fixed to each other, the EUro itself floats withrespect to external currencies such as the US dollar.

Technical Analysis

A method of evaluating securities byanalyzing statistics generated by marketactivity, such as past prices and volume.Technical analysis do not attempt tomeasure a security's intrinsic value, butinstead use charts and other tools to identifypatterns that can suggest future activity.

The methods used to analyze securities and makeinvestment decisions fall into two very broadcategories: fundamental analysis and technical analysis.Fundamental analysis involves analyzing thecharacteristics of a company in order to estimate its value.Technical analysis takes a completely different approach; itdoesn't care one bit about the "value" of a company or acommodity. Technicians (sometimes called chartists) areonly interested in the price movements in the market.

Despite all the fancy and exotic tools it employs,technical analysis really just studies supply anddemand in a market in an attempt to determinewhat direction, or trend, will continue in the future.In other words, technical analysis attempts tounderstand the emotions in the market by studyingthe market itself, as opposed to its components. Ifyou understand the benefits and limitations oftechnical analysis, it can give you a new set oftools or skills that will enable you to be a bettertrader or investor.

Thank you for your attention!