Currency is a monetary unit used to measure the value of a commodity.
Currency is the monetary unit of a country
Currency is a monetary unit of a foreign country, as well as credit and means of payment, expressed in foreign currency units and used in international settlements.
Currency is an international regional monetary unit and means of payment (ECU, SDR, Euro, convertible ruble). Currency system – a state-legal form of organization of international currency relations of the states.
Tasks of currency system:
to effectively mediate payments for exports and imports of goods and other activities in relations between individual countries.
creation of favorable conditions for development of production
promotion of expansion and limitation of intensity of international monetary relations
spillover of economic resources from one country to another, thus expanding the degree of national economic independence.
the transfer of economic functions (unemployment, inflation).
The national monetary system is a certain order of monetary settlements of a given state with other countries. It includes the following elements:
National currency
The terms of convertibility of the national currency
The parity of the national currency
The exchange rate regime of the national currency
Existence of no currency restrictions in the country
National regulation of international currency liquidity of the country
Regulation of international circulation
National currency market and gold market regime
National body servicing and regulating currency relations of the country.
A world currency system is a form of organization of international monetary relations developed on the basis of global economic development and fixed by international agreements.
Convertibility is a possibility for participants of foreign economic transactions to legally exchange national currency into foreign currencies and back without direct government interference in the exchange process.
Currencies can be convertible according to their degree of convertibility as follows:
Freely convertible (reserve currency)
Partially convertible
Closed
Clearing currency
Freely and unrestrictedly exchangeable into foreign currencies, i.e. it has full external and internal convertibility (and the exchange applies to all transactions and payments).
Partial SW: the national currency of the country in which currency restrictions are applied to residents and on certain types of exchange transactions, i.e., this currency is exchanged for certain types of foreign currencies and not on all types of international turnover.
Closed: a national currency that functions only within a single country and is not exchanged for foreign currencies.
Clearing: settlement currency units for which bank accounts are kept and for which settlement operations are performed between countries that have concluded a clearing-type payment agreement on the obligatory mutual set-off of international claims and obligations arising from the monetary equality of goods and services rendered (SDR, euro, transferable ruble).
The exchange rate is the price of the monetary unit of a given country expressed in the monetary units of other countries, i.e. it reflects the interaction between the spheres of the national and world economy.
The exchange rate as well as the price of any commodity has its cost basis and fluctuates around it depending on supply and demand.
Currency parity is the ratio of the weight content of gold in the monetary unit of one country to its gold content in the monetary unit of another country.
Each country implements measures to regulate exchange rates. In the practice of international monetary relations, the following exchange rates are used in the conditions of paper money circulation:
Fixed rate. A fixed rate is a system that assumes the existence of registered parities underlying exchange rates.
Real-fixed exchange rate, which is based on the gold parity
Contractual-fixed exchange rate, which is based on the agreed benchmark, by which the parity is registered and the size of limits of acceptable deviations of market quotations from the parity is agreed upon.
A flexible exchange rate is a system in which currencies have no official parity.
A floating rate changes depending on supply and demand in the market
Fluctuating exchange rate – it depends on supply and demand, but is adjusted by national banks (currency interventions) in order to smooth out temporary sharp fluctuations.
Factors affecting the formation of the exchange rate:
Purchasing power of a monetary unit
Inflation rate
Balance of payments situation
Interest rate differentials in different countries
Currency speculation
Level of confidence in the currency on the global foreign exchange market
Government regulation of currency rates
Quotation – determining the exchange rate of currencies:
Direct – the rate of a unit of foreign currency is expressed in the national currency.
Indirect – the rates of two currencies are commensurate through three currencies.
Currency basket – a set of currencies that are used when quoting foreign currencies. SDR: USA – 42%, Germany – 19%, Japan – 15%, France – 12%, England – 12%.
Central Bank levers that affect the purchase of currency domestically:
- Discount (discount) purchase – change of a discount rate of the Central Bank for the purpose of regulation of an exchange rate by influence on movement of short-term capitals. When the balance of payments is passive, the Central Bank inflates the discount rate and thus stimulates the inflow of foreign capital from countries where the discount rate is lower.
- Currency intervention – direct intervention of the Central Bank in the foreign exchange market in order to influence the exchange rate of the national currency by buying foreign currency. Currency risks – arising in export-import operations and the sale of goods on credit due to changes in the exchange rate of foreign currency against foreign currencies due to a decline in its purchasing power due to deteriorating terms of trade.
Currency clauses are used to minimize currency risks. They are of two types:
Bilateral, which protect the interests of both the buyer and the seller.
Unilateral, which protects interests of suppliers from highly developed countries when supplying goods to developing and developed countries.
In banking practice, various methods are used to insure currency risks by creating counter claims and liabilities in foreign currency (hedging methods).
