EECS 1710 Lecture Notes - Lecture 9: Foreign Exchange Market, Eurozone
24 Jun 2018
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EECS 1710 Lecture 9 Notes
Introduction
Impact of Unfavorable Expectations
Many institutional investors (such as commercial banks and insurance companies) take
currency positions based on anticipated interest rate movements in various countries.
EXAMPLE
Investors may temporarily invest funds in Canada if they expect Canadian interest rates
to increase.
Such a rise may cause further capital flows into Canada, which could place upward
pressure on the Canadian dollar’s value.
By taking a position based on expectations, investors can fully benefit from the rise in
the Canadian dollar’s value because they will have purchased Canadian dollars before
the change occurred.
Although these investors face the obvious risk that their expectations may be wrong,
the point is that expectations can influence exchange rates because they commonly
motivate institutional investors to take foreign currency positions.
Just as speculators can place upward pressure on a currency’s value when they expect it
to appreciate, they can place downward pressure on a currency when they expect it to
depreciate.
EXAMPLE
During the 20102012 period, Greece experienced a major debt crisis because of
concerns that it could not repay its existing debt.
Some institutional investors expected that the Greece crisis might spread throughout
the eurozone, which could cause a flow of funds out of the eurozone.
There were also concerns that Greece would abandon the euro as its currency, which
caused additional concerns to investors who had investments in euro-denominated
securities.
Document Summary
Many institutional investors (such as commercial banks and insurance companies) take currency positions based on anticipated interest rate movements in various countries. Some institutional investors expected that the greece crisis might spread throughout the eurozone, which could cause a flow of funds out of the eurozone. There were also concerns that greece would abandon the euro as its currency, which caused additional concerns to investors who had investments in euro-denominated securities. Consequently, many institutional investors liquidated their investments in the eurozone, exchanging their euros for other currencies in the foreign exchange market. Institutional investors (such as commercial banks and insurance companies) take currency positions based on anticipated interest rate movements in various countries. Investors may temporarily invest funds in canada if they expect canadian interest rates to increase. Such a rise may cause further capital flows into canada, which could place upward pressure on the canadian dollar"s value.
