Oftentimes, currency is not just about the amount of money. It can also be about the value of the currency, its stability, or even the government’s policy.
Commodity money vs fiat money
Unlike fiat money, commodity money is based on the value of a commodity. A commodity is an object with a physical, substance, or ornamental value. The value of a commodity depends on the local supply and demand, as well as the physical properties of the commodity.
In old times, gold and silver were used as money. However, these items are not suitable as commodity money in today’s modern world. They are not very portable, they are not as durable, and they depreciate in value over time. Hence, a more suitable commodity is needed for use as money.
Fiat money, on the other hand, is a government-issued currency, usually paper. Its value is derived from the relationship between supply and demand, and it is backed by government. It is usually issued by a central bank.
There are three major functions of money: it acts as a medium of exchange, it provides liquidity, and it represents an obligation. However, there are many forms of money. Some of the most common are currency, coins, tokens, and legal tender. Ultimately, the value of a currency is determined by its acceptance as a medium of exchange, as well as the production of the commodity.
While commodity money is based on the value of an object, fiat money is based on an obligation to pay in the future. Both have their place in the world, but commodity money is the most suitable form of money for use in the modern world.
Futures contracts vs forward contracts
Whether you’re a trader or a retail investor, it’s important to understand the differences between futures and forward contracts for currency. Both are used for speculative trading, but they carry different risks.
While forward contracts are a great way to lock in the price of an asset, they also carry a higher level of counterparty risk. One party might default on their agreement. The financial institution that originated the forward contract is more exposed to the risk of non-settlement. This is why many corporations and financial institutions prefer forward contracts.
Unlike futures, forwards are not traded on exchanges. They are traded over the counter, or OTC. This makes them more flexible. They’re also customizable, and can be used for hedging volatility. However, they aren’t always available to retail investors.
Futures contracts are contracts that are traded on a futures exchange, which is a centralized exchange that serves the needs of other traders. Compared to forward contracts, futures contracts are more liquid and transferrable. They are also marked to market on a daily basis. They are available on a wide range of assets, including commodities, stocks, and currencies.
Forward contracts are agreements that stipulate the price, date, and delivery method of an asset. The seller will earn a profit if the future price of the asset is higher than the delivery price. A forward contract can be traded for cash settlement, but the seller must still deliver the underlying asset.
Influence of government policy
Several government policy levers can have an impact on the currency. These policy levers include fiscal policy and monetary policy. Governments can regulate interest rates, boost or restrict currency, and regulate transactions. These policies have led to some damaging consequences in the financial markets.
Governments can affect interest rates, GNP, and unemployment rates through monetary policy. Governments can also regulate currency, and the way it is used to store wealth.
Governments can also regulate interest rates and GNP through fiscal policy. These policies relate to the distribution of wealth across different segments of the population. They include taxation, revenue raising, subsidies, and bailouts. These policies are often designed to maintain a stable economic environment.
Governments can also intervene in markets when they believe that a large segment of the economy is failing. They can do this by regulating the economy, reducing interest rates, and providing emergency measures.
In some cases, government policies are designed to boost the economy, such as in an economic boom. They are also designed to suppress economic growth, such as in a recession. Governments can also create subsidies to offset higher taxes and costs.
A country’s fixed exchange rate is designed to ensure that the currency is stable. A country can maintain a fixed exchange rate through modest interventions in the Forex market. However, it is difficult to maintain a fixed exchange rate when a country runs out of foreign reserves. This creates a crisis in the balance of payments. This can lead to devaluation of the domestic currency and a depreciation of the exchange rate. The result is higher prices of foreign goods for residents of the country.