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Global Financing And Exchange Rate Mechanisms: Hard And Soft Currencies

1018 words - 4 pages

Global Financing and Exchange Rate Mechanisms: Hard and Soft CurrenciesCurrency is an item that is exchanged for goods and services. Currency is in the form of paper bills and coins. These paper bills and coins have monetary value and are considered either hard or soft currency depending on the originating country's government. It's estimated by the Bank for International Settlements that $6.4 trillion is internationally financed by banks around the world and that the total world banking assets are over $20 trillion (Hill, 2009). Hard and soft currencies are important because every international trade for goods and services requires them. When governments participate in trading they must guard their currency in order to protect their investments and transactions. The following paper will analyze hard and soft currencies and explain how they are used in global financing operations. Lastly, this paper will describe the important for managing risks with hard and soft currencies.Soft currency is also known as weak currency. Soft currency means that the values of the currency fluctuates frequently and that other countries do not want to possess them due to political or economic insecurity within the country with soft currency (Investopedia, 2009). Most developing countries and low income countries such as Albania, Algeria and Bangladesh are considered countries with soft currency. Current forms of soft currency are the Russian ruble, Mexican peso, Philippines peso, and the Hong Kong dollar. Generally, the governments from these developing and low income countries set unpretentiously high exchange rates, and compare their currency to hard currency such as the United States dollar or British pound. For example, the Russian ruble is considered a soft currency because Russia is a low income country whose rates are fixed at unrealistic exchange rates which are not back by gold. Since soft currencies countries do not back their currency with gold, countries with hard currency such as the United States and Europe are reluctant to trade assets with them. Countries with soft currency normally have several currency depreciations and have problems with credit repayments due to their government's political instability. Soft currency is the least valuable form of payment compared to hard currency.Hard currency is known as the strong currency and is the most valuable form of currency in trading internationally. Hard currency is typically from a highly industrialized country and is a form of payment for goods and services that is accepted worldwide. Hard currency relativity remains stable through short periods of time and is highly liquid in the foreign exchange market (Investopedia, 2009). Hard currency comes from countries that have political and economic stability such as Europe, Australia, United States, and Japan. Examples of hard currency are the British pound, the United States dollar, Japanese yen, and the European Euro. Unlike soft currencies, hard...

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