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Exchange Risks, Transaction Costs and World Inflation

In: Floating Exchange Rates and World Inflation

Author

Listed:
  • Jaleel Ahmad

    (Concordia University)

Abstract

One way in which a flexible exchange-rate regime may have a bearing on the world price level is through a rise in the price of traded goods, as a result of higher transaction costs associated with risk-bearing. In a fixed exchange-rate regime, where changes in official parities are infrequent, the central banks effectively provide forward cover to commercial traders by ensuring the fixity of the spot rate through time. Consequently, foreign exchange risks and transaction costs are kept to a minimum. When exchange rates are subject to sharp and unanticipated fluctuations, commercial traders are obliged to hedge by purchasing forward cover in conjunction with inventory valuation adjustments to offset unexpected fluctuations in exchange rate. The hedging for exchange exposure involves a cost which could be significantly different under fixed and flexible exchange-rate regimes.

Suggested Citation

  • Jaleel Ahmad, 1984. "Exchange Risks, Transaction Costs and World Inflation," Palgrave Macmillan Books, in: Floating Exchange Rates and World Inflation, chapter 9, pages 174-182, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-349-17474-4_9
    DOI: 10.1007/978-1-349-17474-4_9
    as

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