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2.11 Foreign Exchange Rate Risk: Appreciation and Depreciation

At first glance it may seem irrelevant which way an exchange rate is expressed. However, it is important because the words appreciation and depreciation of a currency are used in the market, and this may be confusing if the wrong method is used. If the USD/ZAR exchange rate changes from USD/ZAR 10,00 to USD/ZAR 10,20, […]

2.16 Fees Associated with Forex Investments

A. Broker fees The services of a broker, who is registered with the JSE as an authorised user, are required in order to trade forex on-exchange. Brokers charge a commission or brokerage fee (calculated as a variable percentage of the value of the transaction) for facilitating the trade, depending on trading volume. The fee will […]

2.15 Hedging Versus Speculating in the Foreign Exchange Market

Speculation involves trying to make a profit from an asset’s price change, whereas hedging attempts to reduce the amount of risk, or volatility, associated with an asset’s price change. Hedging usually involves taking an offsetting position in a derivative to balance any gains and losses to the underlying asset. Hedging attempts to eliminate the volatility […]

2.14 Fundamental Versus Technical Analysis

Fundamental analysis involves basing investment decision-making on the fundamental expected cash flows of a bond or equity. In the case of forex, the fundamental analysis would be related to weighing up the various interrelated economic factors that will ultimately affect the supply and demand for a particular currency. Fundamental analysis involves the process of working […]

2.13 Theories of Exchange Rate Determination

A. Purchasing power parityPurchasing power parity (PPP) is the theoretical relationship between the current spot rate and the expected future spot rate via inflation differentials. Since inflation rates and the expected future spot rate do not trade in financial markets on a continuous basis, PPP is not bound by arbitrage but instead gives us an […]

2.12 Why Exchange Rates are Important

Exchange rates are important because they affect the relative price of foreign and local goods, and the relative value of investments. Clearly, the price of US goods for a local importer is a function of two factors:  The price of the goods in USD. The USD/ZAR exchange rate. If an HP laptop computer in the […]

2.10 Cross Rates

The USD is sometimes called the vehicle currency because every country trades its currency in terms of the USD. Thus, one can get a USD/ZAR quote, a USD/MWK (Malawi kwacha) quote, a USD/RUB (Russian rouble) quote, a USD/UYP (Uruguay peso) quote, etc., but one cannot get a “straight” ZAR/UYP or a ZAR/MWK quote, or even […]

2.9 Bid Offer Spread

The difference between the dealer’s bid and offer prices is known as the spread and is the main way in which banks make a profit from foreign exchange transactions with their clients: by buying currencies at a cheaper rate than the price at which they sell. The spread is determined by a number of factors: […]

2.1 Introduction FIC

The currency of each country is the monetary unit of that country. In most countries the monetary unitis established under the statute that governs the operations of the central bank. For example, in South Africa this is the South African Reserve Bank Act 90 of 1989.Almost all countries of the world trade among one another […]

2.2 Exchange Rates

Foreign exchange is deposits and securities in a currency other than the domestic currency Each spot foreign exchange transaction involves two different transactions: the purchase of one currencyand the sale of another currency.Therefore, foreign exchange rates are quoted as a combination of two currencies, which is known as the currency pair. USD/ZAR 8.2400 The currency […]