Coursework Example | Topics and Well Written Essays - 1000 words

Coursework ExampleHigher interest rates mean that lenders in a particular(prenominal) economy atomic number 18 able to enjoy higher return, more that in countries where there are low interest rates. Further, high interest rates are able to draw and quarter international capital and lead to high exchange rates. The effects of high interest rates are solved if inflation in a particular country is slightly higher than in other countries. There are also cases whereby the impact of high interest rates can be apologize through other factors that function to lower the currency (Madura, 1998 14). Effective exchange rates are usually used to determine countrys currency hold dear in relation to other strong currencies in the index. Some of the worlds currency indexes include the U.S dollar, Japanese Yea and the euro. These currencies are adjusted to lower the effects of inflation in some countries. In addition, effective exchange may also refer to the value consumers are likely to put up for an imported commodity. The price usually comprises of both tariffs and other costs incurred as a result of the process of importation (Somanath, 2011 220). 2. Inefficiencies in Exchange Rates and trade Profits Arbitrage profits are made when traders purchase and sell their assets so that they can take advantage of the difference in the price. In particular, trade profits arise due to the exploitation of price differences and takes place in similar financial instruments. In addition, prices can be exploited on various markets as well as in different ways. Arbitrage profits arise due to the efforts geared towards ensuring that prices do not fall from fair value over long periods of time (Clark and Ghosh, 2004 2). Further, arbitrage refers to the simultaneous buying and selling of a commodity or asset in different markets with the main labor of making profits from the difference in buying and selling prices. For example, the dollar price of a British pound may be 1.70 poun ds in capital of the United Kingdom but 1.40 pounds in Paris, a trader can buy 1 pound in Paris then sell that pound in capital of the United Kingdom and make some profit (0.3) per pound sold. If the trader buys 10 million pounds, 3000,000 pounds profit will be realized before any transaction costs, if any exist (Clark and Ghosh, 2004 2). Arbitrage can be seen as an exploitation of the misalignment of market quotes. In a perfectly competitive market, the evident price differentials that lead to arbitrage profits cannot exist. In essence, arbitrage profit is as a result of market imperfection in which traders buy cheap and sell expensively. In immaterial exchange markets, traders have the opportunity to buy and sell continuously. This takes place through the exchange of one currency for another and again for another currency, finally get back to the original currency in the series of instantaneous transactions, and thus leading to profits (Clark and Ghosh, 2004 2). 3. Problems of M aking Payment in a Foreign property in the Future The lease of a foreign currency will certainly affect the price of products to be purchased from that country. Trader therefore, needs to know engage on foreign currencies. The cost of a product may be higher compared to domestic substitutes when the demand of a foreign currency is high. Further, the choice of foreign currency also depends on the investment opportunities available in the particular country and those available in the domestic market. A trader will demand a foreign currency if he or she can transact business cheaply. The demand of a