Question

Commodity Currencies	Term Currencies
	AUD	USD	GBP
AUD	1	0.6814*
USD		1
GBP		1.28	1

^†USD is the USD dollar; GBP is the British Pound and AUD is the Australian dollar

* Read it as AUD/USD = 06814 (1 AUD buys 0.6814 USD)

1. With the help of the given exchange rates, complete the table above. Copy the table into your answer document.  

2. Identify and explain at least two disadvantages that may be associated with maintaining a fixed exchange rate regime.

     

3. You work as a commercial lending manager at the National Australia Bank and have a meeting scheduled with an Australian business client. The business client operates in the garment sector and imports cotton from the United States that is paid for in US dollars. The client wishes to discuss how the recent fall in prices of major commodities exported by Australia may influence the value of the Australian dollar and the cost of doing business for the client. Explain to your client how the decline in commodity prices may influence the value of the Australian dollar relative to the US dollar and its impact on the cost of cotton imports from the US

Answer 1

Commodity Term Currencies

Currencies. AUD USD GBP

AUD 1 0.6814 0.5323

(1/1.28*.6814)

USD. 1.4676 1 0.7813

(1/0.6814*1) (1/1.28*1)

GBP 1.8785 1.28 1

(1/.6814*1.28)

Disadvantages of maintaining a fixed exchange rate regime

1.) There is necessity to intervene in currency market, the central bank have to maintain a huge foreign exchange reserves to maintain the exchange rate.

2.) Fixed exchange rate regime have a lot of imbalances in foreign exchange market, it is not free to change rate as per supply of and demand for foreign exchange in market, it inforce central bank or monetary authority to control/balance the exchange rate.