Money Market And Forex Market
Money market and forex markets are virtually an economic cycle that depends on each other. These types of markets allow the government to raise awareness on savings to borrow when you are in trouble, plus it helps you in your financial system, preventing it from being the one of the factors that cause economic problems for the state, allowing to choose an efficient financial system to channel the scarce resources available to the country to those projects that ensure a net present value, both private and social high.
A. External Money Market
External Money Market is the set of international trade includes total imports and exports of goods, services and capital that are made.
2. Forex Market
The currency market is where currencies are exchanged in different countries and in determining exchange rates. It is, in effect, foreign exchange, but this exchange takes place resulting trade that takes place between countries. The main factor that determines the value of one currency against another is the trade conducted between the two countries of origin of a coin. A market is the constellation of demand and supply in the same key. It is easy to determine who are the actors in this market.
C. Interest Rates In The Money Market
It is very difficult to see how the economy is these days, they just go the market and realize that more and buy fewer items with the same money, and not only that but many times the quality of these products is not the best, this is due to many factors, but most importantly, fluctuations in interest rates etc. Here in a nutshell and in simple terms how the economic system in general. It begins with the production and consumption, are directly affecting businesses and families, then families provide inputs and labor that producers need to create their goods or services to be used in turn by families and the cycle is continuously circulated in essence this describes any simple economy, where only produce what is consumed and where expectations are not growing.
Families provide labor to firms and these in turn provide goods and services for consumption, for its part the government through economic control policies influencing the overall level of consumption expenditure, investment expenditure and of government spending, taxes helps families have less money to invest either in projects or articles of consumption, and thus firms are affected to see some of their production is not due to rotating little purchasing power they have families and so would be obliged to reduce its headcount and resulting unemployment, at present this phenomenon would be no need and no way to continue producing the same amount of items, the government can turn also raise interest rates which would make the investment will decline, as people prefer to rent to put your money in the financial sector and this in turn would be affected as companies solicited less pay because they would much more expensive, thus things, prevent the growth of the company and if this happens may disappear, thus creating more unemployment.
For its part, the financial sector serves as an intermediary between families and businesses because of the money received by families for labor provided to firms some savings is intended to lead to such an intermediary in exchange for an interest rate which in Once the financial sector would put on the market for companies to take it as a credit for its growth and expansion but at a rate slightly higher, this difference between the price of recruitment and placement price would be what intermediation margin call.
Parallel to this, the external sector comes to "play" in the economy through imports and exports through them as contributing to growth or a deterioration of the economy, because when imports are greater than exports produce deficit in the balance of payments, and when exports are greater than imports produce a surplus instead, finding in both cases reflected the influence on the level of unemployment and inflation. As shown, the behavior of interest rates depend on savings and investment is essentially in these two underlying the development of the economic system in general.
But to speak of the main subject we should know more clearly that interest rates are.
Well, interest rates are the price of money in the financial market. As the price of any product, when more money is the low rate when shortage goes up, so that the applicants wish to buy less, ie less resources requested on loan from banks or financial intermediaries, while suppliers seek to put more resources (savings, CDT's). The opposite happens when low rate: financial market plaintiffs seek more loans and the bidders withdraw their savings.
Completing the above definition should be mentioned that there are two types of interest rates:
* The deposit rate or catchment, is paid by financial intermediaries to providers of funds by money collected.
* The lending rate or placement, is that financial intermediaries are the applicants for loans.
If we are in a healthy economy, stable and full of optimism that shows a very favorable market environment in the bag will increase the number of investors, immediately causing a rise in contributions. As a result there is an improvement in earnings expectations of stock market investment and it is obvious that much increase the flow of investment to economic activity in those conditions.
When someone wins in a business is because someone else lost in the same market and at some point. This is because the last investors entering the market are generally newer and inexperienced which is used by more experienced investors or older in the market to get some gains against the new. These last fall to negotiate a tie or loss with experts.
It is also true in regard to an unfavorable market climate, the relatively low contribution limits reached, characterizing the reverse process, which do not flow the same way investors in full. Low prices of the assets at the time attract investment professionals whose role is to buy at lower prices and sell at higher prices. When these agents involved in the market at low prices, pushing up the prices and start the new cycle.
It is appropriate now to bring up interest rates, fluctuations and expectations of these offered for money in banks and financial corporations determine very closely and reverse the stock market behavior, because when the interest rate increases, there are casualties in the prices of listed shares and when the low interest-versa. Since interest rates are low when stocks tend to improve and that because this would decrease the financial costs of businesses which improve their economic performance and thus can distribute more dividends and enhance the contributions as well that this type level of interest in fixed income investments offer lower returns and many people would risk investing in equities is worth noting that low interest rates boost demand for credit by economic agents (consumers) which is reflected as they have greater liquidity and this impacts on business sales increasing and improving the results. This occurs in the theory and would be very desirable to give more in practice, because although the stock movement in Colombia has had an almost imperceptible increase in this last months, there is still much fear and lack of knowledge they possess many people and not know exactly where to invest, because due to the current crisis in the banks are afraid, afraid of losing their savings in case of liquidation or closure of some of these bodies as seen in the past two years.
D. Currency Rates In The Forex Market
There are three ways to set the exchange rate parity or a way over another. These three types are: fixed, flexible and driven.
1. peg:
When the exchange rate is fixed, the government (which acts as a regulator through its Central Bank) sets the parity of its currency against another, and the Central Bank shall take all measures necessary to maintain it. For example, with the establishment of the IMF, the nominal values of the currencies of member countries were defined in terms of gold. For years the official price of gold in dollars was $ 35 an ounce. With the official price of gold in England of £ 14.58 per ounce, the official rate of dollar-pound was of US2.40 per pound. By using the gold standard, as used for decades to establish exchange rates, especially before exercise influence in international trade today, the values of national currencies defined in terms of gold also determined their relative values .
The gold standard is the clearest example of the system of fixed exchange rates. They have three distinctive features or rules.
The government sets the price of gold and, therefore, the value of its currency. The par value of gold is its price in the currency set by the government. The government maintains the convertibility of national currency into gold. Ie automatically buys or sells currency for gold at par value. The government follows a policy of backing of gold or 100% coverage. It remains important in this mechanism to strike a balance between the entry and exit of capital (way to express the movement of supply and demand for local currency) in order to maintain a fixed exchange rate.
Currently there are economies with fixed exchange rates, but no longer based on gold standard, but linked the value of its currency the strongest in the world as it is in fact the U.S. dollar. The case of Argentina is the clearest. Under the gold standard local currency was backed by a quantity of metal. Under the dollar standard, the local currency is backed by a number of U.S. dollars, and is in circulation (money supply) in Argentina's economy only the amount that the country retains U.S. dollars.
How to put a more Argentine peso in circulation is necessary for the "Convertibility Law" take one more dollar reserves, this limits printing money. Prices tend to stabilize because as the depreciation of a currency one of the main causes of inflation, the effect is eliminated. The local currency is then linked to another, as the U.S. dollar in the case of Argentina.
2. flexible exchange:
A flexible exchange rate is one in which the central bank does not intervene to influence the value of its currency in the international market. The foreign exchange reserves of a country remain semi-constant, and fluctuations in supply and demand of a currency is directly reflected in the exchange rates.
There is today a country in the world that has fully implemented a flexible mechanism for setting the exchange rate. Even the United States, through the Federal Reserve, steady but limited part in the international currency market through local actions to establish the up or down the par value of its currency against another country, depending their needs.
3. Managed Change:
When the exchange rate is managed is one in which the Central Bank intervenes occasionally to smooth fluctuations in the value of its currency, without going to extremes to fix the exchange rate.
The United States is the nation with the strongest currency in the world, example of how supply and demand work and apply in the currency market, derived primarily from international trade transactions are performed daily in the world. The why is easy to understand. Anyone anywhere in the world needs or is at the moment, buying something "Made in USA", therefore, in all countries of the world are constantly buying dollars, like yen or marks, other currencies also strong of countries whose products are also being purchased by the minute and need to be paid in local currency. But how many people, in proportion to the previous example, are currently buying Guatemalan products in the world?. Asked another way, how many "quetzal" are buying in the world right now?. That's why some coins are strong and others are not so much. Demand for the dollar, yen and deutsche mark is such that allows American currencies, Japanese and German respectively, are solid and stable.
From this analysis it appears that the exchange rate regime directed or managed is predominant in the world. And, in this way to set the exchange rate, international trade is sustained by the countries, the actor with the greatest weight in setting the exchange rate, far above even what governments decide through their banks central because it is based on a real exchange of goods, goods and services, and therefore the currency. Is a clear example of the implementation of the application of supply and demand in the foreign exchange market.
2. Interactions between the two markets
An important aspect of grief when economic growth is to understand the forms and sources of investment financing.
Regardless of classifications that take the concept "money", their role in the functioning of the economy is basic.
Making an analogy, the money is for the economy as blood for the human body is simply vital. At the same time as the blood is important, so is the one who is "responsible" for circulation (circulatory system).
The country's financial system becomes the "manager" to distribute the money flows.
An efficient financial system is one that channels the scarce resources available to the country to those projects that ensure a net present value, both private and social high.
Another element to consider the high level of globalization of finance, which pushed the savings rates of countries, especially underdeveloped, as there is increased competition among countries for external resources.
In its simplest definition is that savings would be something left to eat or spend today.
The proportion of disposable income that consumers spend. Saving is not just a physical or financial restrictions incurred all operators of an organized society with the hope of spending the savings in the future.
3. It can produce savings are
1. Consumers
* When buying fewer goods and services
* Also, more efficient consumption of goods and services purchased,
* Through prudent use of natural resources and nonrenewable, and
* By proper allocation of expenditure in acquiring goods and services demanded.
1.
2. Companies
* By leveraging economies of scale in general,
* With productivity programs,
* Through the appropriate use of productive factors
* With strict controls on pay and benefits to their factors of production, and
* An important element to consider is that if you have a monopoly industries, they are by definition inefficient and therefore their savings are less than they can generate.
1. The government
At any level (municipal, state or federal) can generate savings by controlling their spending and investment flows. For the huge number of possibilities for the government to save only mention some general points:
* Avoiding the thickening of their employees
* Eliminating Airmen
* Ensure rational use of goods and services the government buys to its daily operation,
* Avoiding the most manipulated and fraudulent purchases,
* Being efficient in the process of levying and collecting taxes and other sources of income.
1. The external sector
(Loans, FDI and portfolio investment) is not more than the overall productivity of other companies
* Proper handling of the exchange rate,
* Financial stability
* Attractive interest rates
* Physical infrastructure
An important aspect of this interaction is the reason for saving, and the reasons why saving is required, is providing many benefits including:
* Provision for contingencies in the short term (precautionary motive).
* To provide for future needs with low income levels, maintain stable consumption throughout life (life-cycle motive).
* To enjoy high interest rates and currency undervaluation (intertemporal substitution).
* To enjoy a gradual increase in spending (the reason for improvement).
* Sense of independence and can do things in the future, without a clear idea or intention of a final action (reason for independence).
* To ensure leeway than speculative investment or project (business reason).
* To inherit, control offspring.
* To meet the pettiness (the sake of greed.)
* To build up deposits to buy houses, cars and other durable goods (reason for engagement).
Although conditions in both promoting and attracting savings are varied and different turn, there is a big factor in common: It takes a macroeconomic stability.
This is basic and becomes a necessary but not sufficient. Internally it can carry out economic policies designed to prosecute or to force the saving of the whole society.
1. Seek positive real interest rates. this requires maintaining a low inflation as rising prices and uncertainty caused negative rates.
2. Ensure sound public finances, which generate domestic savings and accompanied by other policies to avoid a displacement of private sector by the public sector economy in the face of a lack of liquidity by increasing taxes.
3. Promote actions that result in regulations to strengthen the solvency of all financial intermediary, to give certainty to the investor who receive the money expected in the regulations that reduce future bad loans, such as:
* Use the schemes of the Bank for International Negotiations
* Reduce bank concentration
* Increase the capital adequacy ratio
* Improve bank supervision
* When small banks are in trouble, the big push for absorbing
* Government loans to banks in trouble
1. Real opening of the Financial System, to remove the maximum bank concentration, as this increases inefficiency and low innovation.
2. Creating compulsory savings schemes. This can work two ways people replace negative if saving (think the system works).
3. Creating institutions that capture the savings of sectors and regions, economies of scale is not economically viable for commercial banks (savings through post offices).
4. By adjusting the interest rate spreads (In U.S., Europe and Asia are the spreads between 2 and 4.5%, lower than the rate of development banking.
5. Regulating consumer credit.
The above actions could be considered to generate financial savings, here are actions to promote savings through better working of the economic activities of a company
1. Modern investment in transport and communications in both quantity and quality.
2. Promoting an educational system that meets the requirements of business.
3. Seeking a strong economic and administrative deregulation.
4. Stimulating and regulating labor markets, with special attention to the operation and goals of unions.
5. Pay special attention to providing public services so that they are of good quality at competitive prices, regardless of sector (private or public) is in charge of supplying.
6. Stimulate research and development in any production area in order to make at least the same with less, take care of the tax system not more serious to invest.
Besides all the above should ensure that the various markets at different prices reflect the current reality, as markets distorted prices will cause only that scarce resources are misallocated and thereby causing waste and deficit.
All this must be a daily effort and all in crisis and economic expansions, just to promote a culture of savings and productivity and economic efficiency.
MUST REMEMBER THAT THE SAVINGS IMPACT ON LEVELS OF BEING AND QUALITY OF LIFE OF TODAY, BUT THAT sense to use it will be reversed in BETTER LIFE IN THE FUTURE.
4. As the money market operations
Concur that in which all sorts of supply and demand of the various operations of credit and short-term investments, such as discounts of commercial documentation, short-term notes, discounts of negotiable certificates of deposits, reports, deposits, promissory notes and bankers' acceptances. The money market instruments are characterized by their high level of certainty as to the recovery of principal, to be highly marketable and have a low level of risk.
Money trading expands covering trade in securities, and these values are not just government but from industrial and transportation activities, so that trade in money conquers the direct control of a part of the production, which is turn controlled as a whole, then the reaction of trade in money on output is stronger and more complicated.
This implies that a high amount of activities, the money market is split, forming the capital market also moves in the banking or financial system of a country.
5. As currency market operates
Bidders and applicant are the banks involved in currency trading, focusing on those orders. These orders are made by those trading with other countries to meet their obligations in the currency of the country that buys, or for other reasons among which we highlight the political or speculation. Depending on the economic importance of these decision makers, will be the importance of their participation in the market. We assume for the completion of this work, in the end, will the government through its Central Bank, which holds more weight in the definition of parity, based of course on information from the market and accounts internal, as the balance of payments.
One noteworthy example: When a Mexican company needs to buy equipment from another American, the latter hopes his product will be paid in dollars. Conversely, when a Mexican company sells to an American, is hoping his good will be paid in pesos (This assumption will be analyzed in the conclusions). Here is where the strength is directly dependent of a currency against another: The amount of trade conducted between the two countries, and which of the coins was the defendant.
This is based on the basic principle of the Law of Supply and Demand. Currencies like any other good, tend to increase in value when they are most in demand, and lower their value when they are not being required, so that it can take us to a point of equilibrium. But this natural balance can be seen hampered by factors that are unrelated to free trade, resulting from exchange rate policies of each country.
Among the actors in the foreign exchange market, the government is potentially important because, through its Central Bank or to take political decisions, and majority has a direct influence in setting the exchange rate of its currency against another. Greatly depending on the presence of government, will meet the three different ways to set the exchange rate of a country.
6. Conclusions
Upon completion of this work, we can draw the following conclusions:
* A coin as we have seen, can not maintain a fixed value, even less if it is to be achieved against the strongest currency in the world and the country with which we hold 70% of foreign trade.
* The government is an important actors in making decisions and directly influencing and controlling interest in the establishment of the exchange rate of its currency against another.
* The money for the economy as blood for the human body is simply vital. At the same time as the blood is important, so is the one who is "responsible" for circulation, to generate an efficient and stable financial system.
7. Recommendations
* You must be a balance between the currencies, and that today many countries face enormous economic powers such as USA, Japan and Europe.
* Each country must take into consideration that the economy depends heavily on how the government handles the same, which is why a country depends on the integrity and trust to be deposited to the rulers.
* The movement of money in a country gives to all who make up the economy, from the best offers to the faithful applicants, and the awareness of both businesses and state the importance of savings, to create an efficient financial system and healthy.
"Forex market and money market"
The foreign money market: the set of international trade includes total imports and exports of goods, services and capital, they are made.
The foreign exchange market: is the place where currencies are traded in different countries and in determining exchange rates, in effect, the currency exchange is performed resulting trade that takes place between countries world. There are three ways to set the exchange rate or parity:
1. Fixed exchange rate: the government (which acts as a regulator through its central bank) sets the parity of its currency against another, and the central bank should take all necessary measures to maintain it.
2. Flexible exchange: it is one in which the central bank does not intervene to influence the value of its currency in the international market. The foreign exchange reserves of a country remain semi-constant, and fluctuations in supply and demand of a currency is directly reflected in the exchange rates. There is today a country in the world that has fully implemented a flexible mechanism for setting the exchange rate.
3. Managed change: it is one in which the central bank intervenes occasionally to smooth fluctuations in the value of its currency, without going to extremes to fix the exchange rate.
The market for currency market operates as follows: supply and demand are the banks involved in currency trading, focusing on those orders. These orders are made by those trading with other countries to meet their obligations in the currency of the country that buys, or for other reasons among which we highlight the political or speculation. Depending on the economic importance of these decision makers, will be the importance of their participation in the market.
The money market operations as follows, is where you attend any kind of supply and demand of the various operations of credit and short-term investments, such as discounts of commercial documentation, short-term notes, discounts of negotiable certificates of deposits, reports, deposits, promissory notes and bankers' acceptances. The money market instruments are characterized by their high level of certainty as to the recovery of principal, to be highly marketable and have a low risk, there are two types of interest rates:
* Financial intermediaries pay the deposit rate to providers of funds from money collected.
* The lending rate or placement is that financial intermediaries are the applicants for loans.
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