Fluctuations in Foreign Exchange Rates

8/6/2019 Fluctuations in Foreign Exchange Rates

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MacroMacroEconomicsEconomics

luctuations in Foreignluctuations in Foreignxchange Ratesxchange Rates


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Presented ByPresented By

a k a ra n d A sh o k R a n ea k a ra n d A sh o k R a n e 2 55


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Foreign Exchange RateForeign Exchange Rate

Foreign Exchange rate refers to the rate at whichone unit of currency of a country can beexchanged for the number of units of currencyof another country.

In the words the rate of exchange measurenumber of units of one currency which isexchanged in the foreign market for one unit

of another.

US $ 1 = Rs.45.18

This rate is the conversion rate of every US$ 1 to Rs. 45.18


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Factors DeterminingFactors DeterminingExchange RatesExchange Rates

Fundamental Reasons:

- Balance of Payment surplus leads to stronger currency.

- Economic Growth Rates High/Low growth rate.

- Fiscal / Monetary Policy- deficit financing leads to depreciation ofcurrency.

- Interest Rates currency with higher interest will appreciate in theshort term.

- Political Issues Political stability leads to stable rates

Technical Reasons

- Government Control can lead to unrealistic value.

- Free flow of Capital from lower interest rate to higher interestrates.

Speculation higher the speculation higher the volatility in rates


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EURO INR Exchange RateEURO INR Exchange RateFluctuation forFluctuation for

2009-20102009-2010


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Continued.Continued.


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ObservationObservation

It was observed that the Euro exchange rate was stableand showed increasing trend for the initial 9 month of2009.

It had increased from INR 64 per EURO to that INR 70 perEURO till September 2009.

But Since October 2009 EURO started depreciating andreached its lowest in last 3 years i.e. INR 56 per EURO,by June 2010.

Since the launch of EURO in December 1998 It hadalways showed an increasing trend, and this period of9 months from October 2009 to June 2010 was anexception.


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FindingsFindings--Greek Debt Crisis--Greek Debt Crisis

Years of unrestrained spending, cheap lending and failureto implement financial reforms left Greece badlyexposed when the global economic downturn struck.

The debt levels and deficits that exceeded limits set by theEuro-zone were revealed & exposed.

In the first quarter of 2010, the national debt of Greece wasput at 300 billion, which is bigger than thecountry's economy.

The country's deficit is 12.7% of the GDP.

In addition to this even Spain, Portugal, and Irelandalso joined the party worsening the situation further.


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Spain Spain has a fiscal deficit equaling 10% of GDP, unemployment

close to 20% and its GDP was expected to contract by 0.5%that year.

Portugal

Portugal's deficit was a tad lower at 8.5%. The economy wasexpected to grow from hereon but only at a modest 0.5%. Even iffiscal deficit falls, total debt would rise to 90% of GDP.

Ireland

Ireland recorded deficit of14.3% of GDP. Unemployment was stillrunning at a high 13.5%.

GDP contracted by 7% last year and is expected to contract in2010 year as well by 0.9%.

Meanwhile, the countrys borrowing costs have shot up from 1.7%to 3.5% for a 2 year loan.


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ConclusionConclusion

In early 2010, fears of a sovereign debt crisis, the 2010Euro Crisis developed concerning some European states

This led to a crisis of confidence as well as the widening ofbond yield spreads and risk insurance on credit defaultswaps between these countries and other EU members

On 2 May 2010, the Eurozone countries and theInternational Monetary Fund agreed to a 110 billion loanfor Greece, conditional on the implementation of harshGreek austerity measures

On 9 May 2010, Europe's Finance Ministers approved acomprehensive rescue package worth almost a trilliondollars aimed at ensuring financial stability acrossEurope by creating the European Financial StabilityFacility


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Continue.Continue.

All the above actions by Europeangovernments and IMF rattled theinvestors and economies for the world.

Financial speculators and hedge fundsstarted selling EUROS

There was sudden decrease in thedemand for EURO throughout the worldand USD Prices for USD started rising

In response to accusations thatspeculators were worsening theproblem, some markets banned nakedshort selling for a few months


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Fluctuations in USDFluctuations in USD-Prices 2007 2008-Prices 2007 2008

,hat is the reason that made USD the,hat is the reason that made USD thetrongest currency in Universe facetrongest currency in Universe facedownturn?ownturn?


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ObservationObservation

Over the years it has been observed that USD was a goodand stable currency with average price of INR 45.5per USD during the period of 2000-2007.

Since March 2007 USD started depreciating and ittouched the 10 year exchange rate of INR 39 perUSD as of January 2008.

USD has shown a sign of recovery slowly and graduallyover a period of 1.5 years and again reached its

original desired level of INR 48 per USD inOctober 2008, which was also quite high.

Since liberalization in 1992 USD has constantlyappreciated form INR 18.33 per USD to INR 45 perUSD till 1st quarter of 2007, without any major fall tillJanuary 2007 .


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Findings Findings Subprime CrisisSubprime Crisis

The Subprime Boom

Real estate prices rose in the early years of thisdecade, and securitization provided more working

capital for mortgages, lenders relaxed theirunderwriting criteria in order to issue more mortgages.

Investors demanded higher returns on their investmentsand raised demand for MBSs and CDOs backed bysubprime mortgages.

Between 1995 and 2005, subprime mortgagesincreased from 5 % to 20 % of the mortgage market.By 2006 subprime mortgages had increased tomore than $600 billion.

The Deterioration of the Subprime Market

In 2006, short-term interest rates rose while the value of


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In 2006, short-term interest rates rose while the valueof homes leveled off or dropped.

Borrowers with financial difficulties could not refinance orsell their homes to pay off mortgages when they wereunable to make monthly payments.

Default rates on subprime mortgages increasedsignificantly in late 2006 and 2007.

With rising defaults, purchasers of mortgages sought to

force lenders to buy back nonperforming mortgages.

Many smaller lenders that were inadequately reservedand unable to comply with such repurchase demandsfiled for bankruptcy.


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ConclusionConclusion

Between June 2007 and November 2008, Americans lostmore than a quarter of their net worth.

Housing prices had dropped 20% from their 2006 peak

During 2007, at least 100 mortgage companies either shutdown, suspended operations or were sold.

The crisis caused panic in financial markets and encouragedinvestors to take their money out of risky mortgage

bonds and shaky equities and put it into commodities as"stores of value.

Financial speculators seeking quick returns have removedtrillions of dollars from equities and mortgage bonds,investing in food and raw materials.


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As of August 2008, financial firms around the globe havewritten down their holdings of subprime related securities byUS$501 billion.

When Lehman Brothers collapsed during a two day period inSeptember 2008, $150 billion were withdrawn from USAmoney funds.

This is the reason why strongest currency inUniverse faced downturn

It was mainly because of the above mentioned subprimemortgage crisis investors around the world lost faith in USEconomy and started withdrawing their investments from thecountry.

This in turn reduced demand for USD and lead to strengthening

of EURO at the same period.


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Bibliography & WebliographyBibliography & Webliography

The Subprime Mortgage Crisis: An Overview of theCrisis and Potential Exposure (Research Paper)By Edward J. Kirk

http://www.imf.org/

http://europa.eu/index_en.htm

http://en.wikipedia.org/

http://www.economist.com/

http://www.moneycontrol.com

http://www.oanda.com
http://www.imf.org/http://europa.eu/index_en.htmhttp://en.wikipedia.org/http://www.economist.com/http://www.moneycontrol.com/http://oanda.com/http://oanda.com/http://www.moneycontrol.com/http://www.economist.com/http://en.wikipedia.org/http://europa.eu/index_en.htmhttp://www.imf.org/


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Fluctuations in Foreign Exchange Rates