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EXCHANGE RATES
UNIT 26
DISCUSSION
You probably have at least one banknote in your pocket, wallet
or purse. How much is it worth in other currencies? How do
you know?
How is the value (the exchange rate) of the money in your
pocket determined?
If you keep a banknote (e.g. a dollar) in your pocket, you know
that it might be worth less after a few months. Why?
If you deposit it in a bank, of course, it will be worth a little
more. Why?
Why do companies, institutions and people buy and sell
currencies?
Has the value of your currency increased or decreased in the
past few weeks or months? Why?
EXCHANGE RATES – VOCABULARY – MATCH
THE WORDS FROM COLUMNS A AND B.
FIXED
OVERVALUED
UNDERVALUED
GOLD
FLOATING
FOREIGN
MARKET
SUPPLY &
PURCHASING POWER
EXCHANGE
CONVERTIBLE
SINGLE
CURRENCY
FUTURES
COMMON
DEMAND
FLUCTUATIONS
PARITY
CURRENCY
CONTRACTS
CONVERTIBILITY
FORCES
ECXHANGE RATES
EXCHANGE RATES - VOCABULARY VERBS
●Guarantee
●Fluctuate
●Intervene
●Peg against
●Determine
●Adjust
●Speculate
●Revalue
●Devalue
●Settle
●Appreciate
●Hedge against
●Convert
●Depreciate
●Establish
●Exchange
●Manage
READING – EXCHANGE RATES – MK,
pp. 128 & 129
I Read the text and
decide which paragraphs
could be given the
following headings:
A Counteracting
speculation
B Gold convertibility
C Market forces
D Market interventions
E Parity and speculation
READING – EXCHANGE RATES – MK,
pp. 128 & 129
II MK, p. 129 – Write questions to which these could be
the answers, according to the text.
III VOCABULARY –
Find words in the text
that match the definitions
in MK, p. 129.
SPEAKING – EXCHANGE RATES – MK, pp.
128 & 129
GROUP A
GOLD CONVERTIBILITY
Between end of WWII and 1971 –
exchange rates – fixed against – the US
dollar – pegged against – gold
Fixed exchange rates – adjusted
(revalued and devalued) – International
Monetary Fund
Gold convertibility – ended in 1971 –
inflation in the USA – the Federal
Reserve – not enough gold – guarantee
currency
GROUP B
MARKET FORCES
Gold convertibility – replaced –
floating exchange rates
Floating exchange rate – supply and
demand – foreign exhange markets
Buyers and sellers of currency – its
price – rise – fall
Milton Freedman – exchange rates –
settle at stable rates – economic
realities – calculations of central
banks – underestimated –
speculation
SPEAKING – EXCHANGE RATES – MK, pp.
128 & 129
GROUP C
PARITY AND SPECULATIO
Purchasing power parity – cost of
goods and services – different
countries – inflation – currency
depreciates
Financial institutions, companies
and rich individuals – interest rates
– short-term capital gains –
currency appreciates
International trade and foreign
travel – 5% of the world currency
transactions – 95% purely
speculative
GROUP D
COUNTERACTING
SPECULATION
Exchange rate changes –
problems for industry
Futures contracts – hedge
against currency fluctuations
Forward planning difficult – price
of imported raw materials and
exported products – rise and fall
– establishment of the euro, the
common currency in much of
Europe
SPEAKING – EXCHANGE RATES – MK,
pp. 128 & 129
GROUP E
MARKET INTERVENTIONS
 Governments and central
banks – change the value
of currency – intervene –
exchange markets – foreign currency reseves – buy and sell
their own currency – ‘manage’ floating exchange rate
 1992 – the Bank of England – protect the pound sterling – lost
over £3 billion in a day – speculators – impossible to influence
the floating exchange rate
EXCHANGE RATES - SUMMARY
CHOOSE THE CORRECT OPTION.
The value of a country’s A) money B) currency C) exchange rate
is extremely important to all businesses engaged in international
A) commerce B) stock market C) trade – imports and exports.
For over a quarter of a century after the Second World War, most
currencies were A) pegged B) measured C) exchanged against the US
dollar, which in turn was fixed A) according to B) against C) in
comparison to the gold. Since the early 1970s, there has been a
system of A) floating B) flotation C) flotating exchange rates, largely
A) fixed B) determined C) caused by supply and demand, which in
theory reflect a country’s balance of A) accounts B) finance C)
payments and a rate of A) devaluation B) depreciation C) inflation.
EXCHANGE RATES - SUMMARY
In fact many currency movements seem to be influenced by
A) investments B) speculation C) banks rather than
underlying economic activity. Currency speculation in
Europe was greatly reduced by the adoption of a A) usual
B) common C) unique currency, the Euro, by twelve
countries in 2002. Many economists defend the floating
rate system and the necessity for a common European
A) currency B) exchange rate C) bank.
HOMEWORK – CASE STUDY – MK,
pp. 130 & 131
Case study: A currrency transaction tax + Writing
(a brief summary of your decisions)