Hannah Yanoski

Dr. Guo
FIN 344.50A
2/26/2021
Module 2: Currencies
This module was extremely insightful to the topics that we are discussing in class
currently. It goes over the different aspects of the currency markets and how they are
interrelated. This module dives deep into the mechanics of the currency market, how countries’
currencies are valued, the role that central banks have in those valuations, and the risk that is
associated with the buying and selling of currencies.
The first module covers the mechanics of the currency market. First it goes over that the
majority of individuals working on the currency market are financial investors, followed by
corporations, and finally travelers. It also goes over pegged currencies, and how central banks
shift funds into foreign exchange reserves to hold true to their pegged value. It also discussed
free floating currency, and how they move in a matrix. These currencies rise and fall daily in
relation to the other nations of the world, and are subject to triangular arbitrage, stating that
converting currency into other forms of currency and back again when the rates remain the
same in the starting currency does not affect the currencies value at all. This module help
provide a solid understanding of the basic and showed me how certain currencies interact with
each other on the world marketplace.
The second module was covered the valuation of foreign currency and how it is decided
in foreign markets. The concept of total weighted baskets is introduced to show the relative
strength of a currency against its greatest competitor. The idea of “law of one price” is
introduced as the long-term driver of a nation’s currency, stating that in the end, a good or
services should cost just as much all over the world. The biggest drivers of currency value in the
short term are surprise change in interest rates, inflation, and in total trade. These three things
move prices relative to other nations. This module gave me insight as to how the prices of these
currencies fluctuate daily and over time, deepening my knowledge of currency prices.
The third module discussed the role of central banks and their role in currency prices.
Central banks have the ability to implement policies and interest rates that can help stop
inflation or deflation to stabilize and grow the valuation of a nations currency. They are the law
maker of the nation’s investors and can help drive the valuation of currency in any direction
they want. They can choose to print new money, they can shift rates charged, all things that
have direct impact on exchange rates. This module helps me gain deeper understanding on the
policies countries banks implements and how they are taken withing specific currency markets.
The final module discusses how investors handle the risk associated with fluctuating
exchange rates. Companies and investors alike monitor future predictions for the rise and fall of
exchange rates of two countries and are able to hedge or speculate in order to save or make
money when it comes to converting their currency. Companies can forward agreements on
exchange rates if those forward agreements would help them save money in the future
possibly, and if nothing else those forward agreements would help the know for a fact how
much their money would be worth in the future in terms of another nations currency. This
certainty allows for more accurate future planning, which is the backbone of most business
doing international work and trade. This module taught me it’s possible to commit to forward
exchange agreements, and that those agreements are another tool investor can use to sure up
risk and offer another opportunity to save/make money for companies in the future.