if a currency price is expected to rise in the future what is the higher price course hero

What happens when a currency price is expected to rise?

If a currency price is expected to rise in the future, a buyer pays a higher price, which is considered a forward discount? Hedging is described as measures taken by a company or corporation to protect itself from the loss that may occur because of fluctuations in the exchange rate of currency?

Is it true that the price of everything increases over time?

It is true that the price of most goods and services do increase over time due to inflation. So, if you are planning to purchase an item several years in the future, you cannot plan using today’s price. Instead, you should plan to pay a higher price related to expected inflation rates.

How does a strong currency affect the value of exports?

But before this happens, export-dependent industries can be damaged by an unduly strong currency. The basic formula for an economy’s GDP is: From this equation, it is clear that the higher the value of net exports, the higher a nation's GDP.

What happens when a currency is too strong?

Realistically, an unduly strong currency can exert a significant drag on the underlying economy over the long term as entire industries are rendered noncompetitive and thousands of jobs are lost. While consumers may disdain a weaker domestic currency, a weak currency can result in more economic benefits.

How does a strong currency affect the economy?

A strong domestic currency exerts drag on the economy, achieving the same result as a tighter monetary policy (i.e. higher interest rates ). In addition, further tightening of monetary policy at a time when the domestic currency is already strong may exacerbate the problem by attracting hot money from foreign investors seeking higher yielding investments (which would further strengthen the domestic currency).

What causes currency to fluctuate?

Numerous factors influence exchange rates, including a country' s economic performance, the outlook for inflation, interest rate differentials, capital flows and so on. A currency's exchange rate is typically determined by the strength or weakness of the underlying economy. As such, a currency's value can fluctuate from one moment to the next.

How much did the yen appreciate in 2009?

As a result, the yen appreciated by more than 25% against the U.S. dollar in the five months to January 2009. Then in 2013, Prime Minister Shinzo Abe unveiled monetary stimulus and fiscal stimulus plans (nicknamed " Abenomics ") that led to a 16% plunge in the yen within the first five months of the year. 4 

What is the effect of weak currency on trade?

A weak or strong currency can contribute to a nation's trade deficit or trade surplus over time.

Why do governments prefer FDI to foreign portfolio investments?

Governments generally prefer FDI to foreign portfolio investments, because the latter is hot money that can leave the country quickly when conditions grow tough. This capital flight can be sparked by any negative event, such as a devaluation of the currency.

Why do people not pay attention to exchange rates?

Far-Reaching Currency Impacts. Many people do not pay attention to exchange rates because rarely do they need to . The typical person's daily life is conducted in their domestic currency. Exchange rates only come into focus for occasional transactions, such as foreign travel, import payments or overseas remittances .

Why is it important to have a strong currency?

An international traveler might harbor for a strong domestic currency because that would make travel to Europe inexpensive. But the downside is a strong currency can exert significant drag on the economy over the long term, as entire industries are rendered noncompetitive and thousands of jobs are lost. While some might prefer a strong currency, a weak currency can result in more economic benefits.