Factors that Influence the Volatility in Exchange Markets in China Research Paper

Factors that Influence the Volatility in Exchange Markets in China - Research Paper Example Factors that Influence the Volatility in Exchange Markets in China Foreign exchange influences the countries ability to conduct business relations with its trading associates. Therefore, the factors, which control the exchange patterns of a countries currency, become vital to it. Considering this, the Central banks have the mandate of monitoring the exchange fluctuations of the currency. It is in a position to instill stability of the currency by tightening the financial policies of exchange rates of banks and bureaus. The first role includes the â€Å"transfer function† which is essential in facilitating the transfer of the purchasing capacity of the trading countries. For example, if the exchange rate US is superior to that of China, for instance 2.68 Yuan: 1$, the Chinese firms will incur more to import from US. The second is the â€Å"credit function† role that entails the provision of credit for foreign trade. The transfer of commodities takes time, and this transit period requires financing. The trader’s exchange agents and banks furnish the foreign traders with credit facilities to facilitate trade. Thirdly, the exchange rates assist in hedging against the variation of the currency markets. The exchange rates market has structures that importers and exporters can use to evade the excessive costs and risks of exchange rate patterns. Hedging enables corporations evade the exchange risks through exchange agreements by using the following rates: Fixed exchange rates, Forward exchange rate and Spot rate. Relevance of Spot Exchange Rate (SER) in exchange markets The spot rate is the existing transfer rate of foreign currencies in comparison to the home currency (Wang, 2009). This rate is determines by the existing economic situations in a country. Interestingly, the political circumstances of the country also have a considerable effect on the exchange rates. Therefore, changes in the fu ture expectations can disrupt the current spot rate. Miller (2002) suggests Spot rates are crucial since they depict the