Question

How can currency traders benefit from exchange rate differentials? What are the advantages and disadvantages for a nation with a strong currency

Answer 1

How can currency traders benefit from exchange rate differentials?

Currency traders are people that exchange one currency with another in return for a certain sum of money usually as a commission which they tend to charge for their services.

Exchange rate differentials happen when one currency gets higher in value when compared to others or lower as the case may be. Currency traders in such situations tend to earn money through active and correct speculation.

Consider a situation when the currency trader was to correctly speculate an increase in the exchange rate of one currency when compared with others. This could happen because of numerous factors such as increased flow of exports etc. In such situations, currency traders would directly be benefitted if they held the currency for a larger time period, since in the future they would gain from such price rise.

The exact opposite would happen in case of speculative reduction in the prices of a currency in which the trader can sell the currency today and earn profits later by repurchasing the same at a higher rate respectively.

What are the advantages and disadvantages for a nation with a strong currency?

A strong currency is one which has a higher trade value when compared to others across the globe. The advantages and disadvantages of a strong currency are as explained.

Advantages:-

• The first advantage of a strong currency is that price of imports for the country is lower. Thus they can easily get products from across the globe at a cheaper rate when compared to others.
• This leads to a situation in which the people of the country tend to live better lives and have a higher standard of living since they can enjoy goods from abroad very cheaply.
• Also, countries which have strong currencies find it easier to travel abroad since the exchange rate differentials allow them to have higher value of money than others who visit respectively.

Disadvantages:-

• It is difficult for such countries to export their products as exchange rate differentials make things very expensive. Unless there is a significant difference in the quality of such products, countries tend to skip such products in favor of others as these tend to be more expensive respectively.
• Aside an added disadvantage which people find themselves facing is that the number of tourists getting into such countries tend to be relatively small since currency differences shoot up the overall costs for them.

Please feel free to ask your doubts in the comments section if any.