Global Financial Management –
SHORT ESSAY QUESTION
Question 1
The dirham is pegged or fixed in terms of the exchange rate for the US dollar. That is so because the earlier one is an oil-exporting country and has the country’s sovereign wealth funds. The current situation has been observed to demonstrate how the US dollar will tend to be the dominant currency during the next decade. Many currencies will gear up, but the US dollar may continue to stay on top. The country has pegged the dirham to control the volatility of its exports.
As this dirham is fixed to the dollar, the UAE currency thus directly represents any change in Observers predict that perhaps the UAE dirham would benefit against most subcontinental currencies in the future. Similarly, the US dollar may remain the prevailing world’s reserve currency and will retain its dominance during the next ten years on the global economy.
AED is amongst the most stable currencies of the world. Recently AED has seen deflation as well and the rise of US currency value. As in the prospects, it has been predicted that the UAE dirham will remain stronger over the next decade due to the said government’s strong industrial policies.
Question 3
The carry trade is among today’s most significant investments in the financial markets. This includes the sale or borrowing of a low-interest asset to use the proceeds to finance the acquisition of another purchase at a higher interest rate. You benefit from the interest rate differential by charging a lower interest rate on one asset and receiving the higher interest received by the other asset.
Incorporating trades to take full advantage of carrying interest offers you an advantage because you also earn interest income in addition to trading profits. Carry trading often lets anyone use leverage to sell money that you wouldn’t be able to finance anyway. The common interest paid on the carry trade is dependent on the leveraged sum, which, from a relatively modest outlay, can make huge profits.
Nevertheless, carry trading carries considerable risk, precisely because of the volatility of the exchange rate. The high leverage levels used in carrying trades also mean that small exchange rate volatility may result in significant losses whenever an investor fails to adequately hedge their position. For these reasons, have trading is only the right choice for traders with an appetite for high risk. In any event, it should never be your trade’s main engine, but an additional feature that gives you an edge over the financial markets.
Question 4
Authorities often played a much larger role globally in managing their currency’s value than other currencies; in other words, the exchange rate. There was a time, in fact, not so long ago, when free currency exchange markets, the foreign exchange market, didn’t even exist.
Financial institutions, particularly developed-country central banks, maintain large currency reserves in both international and domestic currencies. This can be mobilized in times of need when they want to manipulate the foreign exchange market and affect their currency’s relative value. Governments affect the supply of money of a currency through specific monetary policy. Therefore money supply is essential to currency supply and demand.
Governments have many ways to manipulate their supply of money, with their interest rate manipulation being a major one. Central banks do this by reducing or raising the rates charged by central banks to lend money to banks, which has various economic effects, including affecting the sum of funds that flows into and out of a country. All central banks ‘actions have to be on the forex traders’ radar since these actions, or even mere speculation, can drive markets.
Question 8
When the central bank purchases a foreign currency, a sterilized foreign exchange interference occurs and replaces the domestic currency’s rise via offering domestic sovereign bonds, which lowers the number of securities in the money supply. At least two payments involving the purchase or selling of foreign currency reserves are included in a sterilized foreign exchange, followed by an open – market operations of the same size to balance the effect of the first exchange on the monetary base.
If the Federal Reserve purchases foreign bonds, it has the same effect on the supply of money and interest rates as US Treasuries purchasing. All purchases boost the levels of reserves. They are consequently increasing the supply of money by the purchasing cost, which lowers the interest rate due to the higher supply of money. Therefore, the Fed sells treasuries to cover foreign purchases.
The word unsterilized currency exchange interference refers to how, though not buying foreign currencies or by not exchanging domestic currencies or properties, a country’s monetary officials control exchange rates as well as its money supply. For exchange rate fluctuations, this type of strategy is passive, allowing for volatility throughout the currency supply. Unsterilized foreign exchange interventions are often referred to as non-sterilized strategies and can be associated with sterilized interventions.