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Cost Accounting

Essay by   •  February 21, 2016  •  Essay  •  776 Words (4 Pages)  •  1,042 Views

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        There are three sections in the Bloomberg market concept Currencies module, which are Currency markets mechanics, Currency valuation, Central banks and the Currencies, and Currency Risk.

        Currency is a general form of money, it is issued by government and circulated within an economy. Every security is denominated in term of currency and they are for all investors make ever an explicit or implicit assumption of currency evaluation.

        Because of the currency used to be straight forward predetermined exchange rate, based Bretton Woods agreement in World War II that agree to lock the world currency into US dollars, the US dollar is convertible and determined its price by one ounce of gold, that is the gold standard. Besides, the modern currency market is based on paper money, the Bretton Woods agreement locked the exchange rates of various paper currencies.

        According to the module, average 5 trillion dollars transactions for currency conversion in each business day, therefore, currency conversion transaction would match the world GDP in two weeks. There are three entities always do currency conversion transaction, which are financial investors, corporations, and international traveler.

The U.S dollar is the world’s reserve currency and is most traded currency. There are two reasons: First of all, the US dollar is the easiest trade currency in the world, because the US dollar acts as intermediary in triangular currency transactions and act as global reserve currency. Second, the US dollar is also an important factor in the foreign exchange rate market for other currencies, where it may act as a benchmark or target rate for countries that choose to fix or peg their currencies to the USD's value. 

        The process of currency valuation based on the gold standard, the more gold on hand, the more secure the currency was considered to be. It would be worth more when exchanged for currency issued by as country that possessed smaller reserves of gold. Today, this currency valuation process will involve evaluating the current rate and flow of commerce. Evaluating the current rate means taking into consideration when exported goods and services to other countries. Flow of commerce means direct impact on the valuation of currency between any two countries. Besides, other factors would have large impact on currency valuation such as natural disasters.

The module also introduce the three main currency drives: surprise changes in interest rates, surprise changes in inflation, and surprise changes in trade. For example, higher interest rates increase the value of a country's currency and attract more foreign investment. Conversely, lower interest rates tend to be unattractive for foreign investment and decrease the currency's relative value. The inflation has close relative with interest rate, but it always has a significant negative effect on currencies’ value and foreign exchange rate. For trade, when country export goods or service, they buy home currency, when country import goods or service, they sell home currency. In conclusion, in the long run, the law of one price drives currency values, in the short run, there are three drives of currency valuation, which are interest rate, inflation, and trade.
        A central bank is an institution that manages a currency, money supply, and interest rates. The primary function of a central bank is to control the nation's money supply through active duties such as managing interest rates, setting the reserve requirement, and acting as a lender of last resort to the banking sector during times of bank insolvency or financial crisis. The central bank control the levers of the currency markets, and control the inflation and deflation rate. The standard inflation target is 2%. According to definition, inflation can lead to a vicious cycle of pay increases leading to price increase, deflation can lead to a vicious cycle of purchase deferrals and layoffs.

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