Mgt448 Global Finance Paper

998 words - 4 pages

Warren Hill in his book, Competing in the Global Marketplace states that "international financing extended by banks around the world reporting to the Bank for International Settlements is estimated at $6.4 trillion, including $4.6 trillion net international lending. Total world banking assets are put at more than $20 trillion, insurance premiums at $2 trillion, stock market capitalization at over $10 trillion, and market value of listed bonds at about $10 trillion. In addition, practically every international trade in goods or services requires credit, capital, foreign exchange, and insurance" (Hill, 2004). Because of the large amount of currencies, as well as the wide variety amongst currencies, governments who wish to participate in trading must be able to protect their investments and transactions. This paper will to discuss the use of hard and soft currencies in aiding in the protection of those investments and/or transactions.Soft Currency is defined as, "weak currency who's value fluctuates often" (Investopedia). Soft currency is a less desirable means of payment when compared to hard currency, primarily due to reliability. Countries with soft currency tend to have frequent currency devaluation, credit payment difficulties and political unrest. Soft currency is typically not able to be exchanged for currency of other countries due to its unrealistic exchange rates. Some of the current soft currencies are the peso, the Baht, Zlotys and the Hong Kong dollar.According to Investopedia, hard currency is defined as "a currency, usually from a highly industrialized country, that is widely accepted around the world as a form of payment for goods and services. By its nature, hard currency is expected to remain relatively stable through a short period of time and to be highly liquid in the foreign exchange market. Another condition for hard currencies is that it comes from a politically and economically stable country such as the U.S. Europe, England, Australia, and/or Japan" (Investopedia).As hard currencies, the US dollar, European Euro, Francs and the Japanese yen are all usually backed by hard money policies, for example using gold, silver, or platinum to support the value of its currency with a real, tangible and lasting material that holds its value over a longer period and keep it stable. The primary strengths of hard currencies are that they are freely convertible and they do not depreciate dramatically in value. Hard currencies are usually in high demand and the exchange rate tends to appreciate because of steady high demand relative to supply, which is the opposite with soft currencies.Centuries ago, many types of currencies were used in one economy or country like using hard currencies as well as soft currencies. Gold, copper, and silver were commonly used during the barter system era. After the era of using soft currencies as a medium of exchange for goods and services, currencies like dollars and pounds were created. "The newly created...

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