Global Financing and Exchange Rate Mechanisms

Veronica L. Powell

University of Phoenix

MGT/448

Donald Joseph

March 31, 2009

Global Financing and Exchange Rate Mechanisms

Currency is unreliable. In some countries the United States dollar is worth more than that countries currency, while in other countries the U.S. dollar is worth less. The exchange rate fluctuates on a continuous base which makes the term “funny money” more realistic each day. The purpose of this paper is to discuss hard and soft currency, the South African rand, Cuban pesos, and why the exchange rates fluctuate.

Hard currency is a currency, usually from a highly industrialized country, that is largely accepted globally as a form of …show more content…

National currencies are important to the way modern day economies function. The national currencies allow businesses to logically express the value of a good, service, or product globally. Exchange rates are needed because one countries currency is not always accepted in another country. An exchange rate is simply the cost of one form of currency in another form of currency (Grabianowski, 2004). For example, if 1 South African rand is exchanged for 80 Japanese yen, the consumer purchased a different form of currency to use in while in Japan.

Many centuries ago, currencies of the world were covered by gold. A piece of paper currency was issued by any world government agency that represented a real amount of gold being held in a vault by that government agency (Grabianowski, 2004). In the 1930s, the U.S. set the value of the dollar at a single, unchanging level: 1 ounce of gold was worth $35 (Grabianowski, 2004). Other countries based the value of their currencies on the U.S. dollar after World War II. Since everyone knew how much gold a U.S. dollar was worth, then the value of any other currency against the dollar could be based on its value in gold (Grabianowski, 2004). Currency worth twice as much gold as the U.S dollar was, subsequently, also worth two U.S. dollars (Grabianowski, 2004).

The two main systems used to determine a currency’s exchange rate are: floating currency