Curreny Market Mechanics

• Exchange rates
• Drivers of exchange rates
• Central banks as currency guardians
• Hedging currency risk

1. Financial Investors: banks, financial institutions, security firms -> 5%
2. Corporations: conducting business cross borders
3. Travelers: for personal use

Pegged currencies FX reserve

Triangle arbitrage

British, Mexican, and Argentine crises all resulted in devaluations. Donald Tsang successfully defended the Hong Kong dollar peg

• Over $5T of currencies are traded every day
• 1971 marked the dawn of the modern currency market
• Several countries peg their currencies to other currencies
• Locked exchange rates are not actually set in stone but are government aspirations
• Floating currencies move against one another in a matrix
• The U.S. dollar is the world’s reserve currency and is the most heavily traded currency

Currency Valuation

• surprise changes in interest rates: when a central bank unexpectedly decreases interest rates, the government bond yields go down. This deters investment from around the world, reducing demand for that country’s currency. The currency, therefore, typically weakens.
• surprise changes in inflastion: central bank prints money, weaken a currency. Inflation - CPI, e.g. Indian Rupee
• surprise changes in trade: