International Finance Management - Term Paper Example

Forward contracts however can not change hands and are contracts between two parties. Prevailing interest rates in the respective markets have a major impact on the increase or decrease of a contracts price. For example if the GBP/USD contract is on sale at CME, than an increase in the interest rates prevailing in the British economy would increase the contract price and those in the United States economy would decrease it. This is because there is a direct link between the price of value of a currency and interest rates.

If for example interest rates are reduced money supply will increase in the economy. According to the economic laws of supply and demand, an increased supply would result in lower prices. Thus the futures expected price of currency would also decrease. Balance of trade is without doubt the most important factor that can affect the price of a currency. Balance of trade refers to the difference between what a country imports and exports. Also called the current account balance, it can only be offset if investors keep investing in dollar dominated assets.

If a country gives a budget with a deficit, it can only fill up that deficit by borrowing money for the national or international market. The government will have to use up its currency reserves to pay off international debt and possibly print more money to pay of national debt; these will decrease the value of national currency. The stability of the government is also a huge factor in determining the increase or decrease of national currency value. This is because a stable government establishes stable policies; this stability reduces investor risk thus increasing currency value.

These factors have huge impacts on Currency value. This is because the risk associated with the currency is high in war and the risk of default; on foreign payments also increase. In case of Natural disasters, the expenditure of the country increases on