Legal theft: In the eye of the beholder
Güncelleme Tarihi:
by Gary Lachman
Oluşturulma Tarihi: Mart 07, 2009 00:00
The Turkish Lira has been bouncing around between 1.70 and 1.73 to the U.S. dollar. I feel like Turkey has been cast in the role of a victim of the financial crisis, because it certainly was not an instigator. So how does this all work? Why has Turkey’s Lira dropped in value against the very same currency that some say was the villain of the current tale of financial rape and pillage?
Trading places: The concept of correlation
The trading of financial assets (stocks and bonds) in a lightening-paced global market has recast the way analysts and traders look at currencies. Traditional variables such as economic growth, inflation and GDP are no longer the only causes of currency fluctuations. Currency transactions related to trading in goods and services has fallen far behind the amount of foreign exchange transactions resulting from cross-border trading of financial instruments, assets and equities.
The market views currencies as asset prices traded in an efficient financial market. Consequently, currencies are demonstrating a strong correlation with other markets especially when a buyer with one currency is purchasing assets traded in another currency. Therefore, the profitability of any given stock trade can also be affected by the relative values that the respective currencies hold towards one another.
Like the stock exchange, money can be made or lost on the foreign exchange market by investors and speculators buying and selling at the right (or wrong) times. Currencies can be traded at spot (at the moment) and foreign exchange options markets. The spot market represents current exchange rates, whereas options are derivatives of exchange rates. A market-based exchange rate will change whenever the values of either of the two relevant currencies change. A currency will tend to become more valuable whenever demand for it is greater than the available supply. It will become less valuable whenever demand is less than the available supply.
Increased demand for a currency is due to either an increased transaction demand for money, or an increased speculative demand for that money. The transaction demand for money is highly correlated to the country's level of business activity, GDP and employment levels. The higher the unemployment rate, the less the public can spend on goods and services. Central banks frequently adjust the available money supply to accommodate changes in the demand for money.
The speculative demand for money is much harder for a central bank to accommodate but they try to do this by adjusting interest rates. An investor may choose to buy a currency if the return (that is the interest rate) is higher than in other countries. Some say that currency speculation can destabilize real economic growth. Artificially induced opportunities could arise if large-scale currency speculators deliberately create downward pressure on a currency in order to force that country’s central bank to sell their currency to keep it stable. When that occurs, the currency value almost always drops, and the speculator can buy the currency back from the bank at a lower price. The speculator then closes out their position, takes their profit and goes home to count their windfall. Has this been happening to Turkey? If so, who is the villain? © 2009 Gary S. Lachman
Gary Lachman is an international lawyer formerly with the US Department of State, real estate developer, and associate professor at the Johns Hopkins University with a consulting practice in Istanbul. He can be contacted at glachman@lachmanyeniaras.com.
The trading of financial assets (stocks and bonds) in a lightening-paced global market has recast the way analysts and traders look at currencies. Traditional variables such as economic growth, inflation and GDP are no longer the only causes of currency fluctuations. Currency transactions related to trading in goods and services has fallen far behind the amount of foreign exchange transactions resulting from cross-border trading of financial instruments, assets and equities.
The market views currencies as asset prices traded in an efficient financial market. Consequently, currencies are demonstrating a strong correlation with other markets especially when a buyer with one currency is purchasing assets traded in another currency. Therefore, the profitability of any given stock trade can also be affected by the relative values that the respective currencies hold towards one another.
Like the stock exchange, money can be made or lost on the foreign exchange market by investors and speculators buying and selling at the right (or wrong) times. Currencies can be traded at spot (at the moment) and foreign exchange options markets. The spot market represents current exchange rates, whereas options are derivatives of exchange rates. A market-based exchange rate will change whenever the values of either of the two relevant currencies change. A currency will tend to become more valuable whenever demand for it is greater than the available supply. It will become less valuable whenever demand is less than the available supply.
Increased demand for a currency is due to either an increased transaction demand for money, or an increased speculative demand for that money. The transaction demand for money is highly correlated to the country's level of business activity, GDP and employment levels. The higher the unemployment rate, the less the public can spend on goods and services. Central banks frequently adjust the available money supply to accommodate changes in the demand for money.
The speculative demand for money is much harder for a central bank to accommodate but they try to do this by adjusting interest rates. An investor may choose to buy a currency if the return (that is the interest rate) is higher than in other countries. Some say that currency speculation can destabilize real economic growth. Artificially induced opportunities could arise if large-scale currency speculators deliberately create downward pressure on a currency in order to force that country’s central bank to sell their currency to keep it stable. When that occurs, the currency value almost always drops, and the speculator can buy the currency back from the bank at a lower price. The speculator then closes out their position, takes their profit and goes home to count their windfall. Has this been happening to Turkey? If so, who is the villain? © 2009 Gary S. Lachman
Gary Lachman is an international lawyer formerly with the US Department of State, real estate developer, and associate professor at the Johns Hopkins University with a consulting practice in Istanbul. He can be contacted at glachman@lachmanyeniaras.com.