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Exchange Rate System In finance, the exchanging rate between two currencies means how much one currency is worth in terms of the other. There are a lot of factors that influence this correlation; and among them there is economic growth, inflation, political and social situation in the countries. According to the facts, reported by Lyudmyla Musina, Head of the Economic Strategy Department of the Ministry of the Economy and European Integration of Ukraine in 2005, Ukraine has been making stable economic growth during last years. She said, According to the real growth rates of major economic indicators the country holds a leading position among the CIS countries. (Musina L. , 2005). She pointed that the country had a stable exchange rate, and a high positive balance of foreign trade (Musina L. , 2005). Since the time of the Orange Revolution in Ukraine, in 2004, the situation in the country seemed to become more stable and better.
A lot of social problems were solved doe to advanced reforms and positive changes in the economy. The guarantee of the financial stability in the economy was unflactuated currency market (annual average exchange rate will amount UAH 5. 6 - 5. 7 per US$ 1). In 2004, for the last week the average rate was 0. 19304; in 2005, for the same period it was 0. 19869; and in 2006, for the last week it was 0. 20200, according to the data of onda. com. (Fxhistory, 2006) Nowadays, $ 100, 000 portfolio is worth 500, 050 UAH (hrivnas).
The facts prove that the situation with the currency in the country is rather stable. In July 21, 2005, Mr. Draper, Managing Partner of Draper Fisher Jurvetson, said, "The recent political upheaval known as the Orange Revolution provides the opportunity for a business revolution in Ukraine. (DFJ, 2005) Since that time the total amount of investments has increased to US$ 1 billion. It has given an opportunity to carry out activity without going risk to lose assets. But having made investments, people want to be that the asset will retain its value in the future. Most people will not be interested in a currency if they think it will devalue.
A currency will tend to lose value, relative to other currencies, if the country's level of inflation is relatively higher or if a country is troubled by political uncertainty. And nowadays the situation looks like that in Ukraine. Inflation reached 8 % in 2003, 12. 2 % by the end of 2004; and was reduced to 9. 1 % by the end of 2005. But experts predict that inflation in Ukraine may reach 15 % in 2006. It may cause because of price rising for natural gas, tariffs for gas and electric power for the population. Even seasonally lowering prices for agricultural products will not reduce the level of inflation that was effected of the raises in tariffs for gas, electric power and transportation.
There were several preconditions that made Ukrainian economy so vibrant. Since the time of the Orange Revolution the political situation in the country has been very unstable. The former Prime-minister Yulia Tymoshenko began the process of re-privatization. Mixed messages from the government over how many enterprises could be subject to re-privatization, and the criteria on which cases would be decided, created paralyzing uncertainty among incumbent and potential investors. (Views Wire Eastern Europe, 2006) Later new Prime-minister Mr. Yekhanurov stopped the process of re-privatization by the end of 2005; and since that time businesses have become more confident. But in spite of this the experts suggest more modest progress for the countrys economy beyond this year.
As it was said nowadays the political situation in the country has worsened and has become more unstable. Though the economy has grown strongly in recent months but investors are not certain in its growth in future. Thats why it would be better for companies doing business in Ukraine to hedge their currency. Most of all, since 2003, several exchange rate systems have been used to reduce the risks of currency fluctuation. The cash pool helps client manage multi-currency deposits & loans on a fully hedged basis. A lot of multinational banks provide clients with the local liquidity they need for their businesses.
Bibliography: Fxhistory: historical currency exchange rates. (2006) OANDA Corporation. Retrieved July 30, 2006 from web Musina L. (2005). Prospects for the Economic Development of Ukraine: Public debates. ESDP. Retrieved July 30, 2006 from web Tim Draper visits Ukraine to start VC Fund. (July 21, 2005).
DFJ. Retrieved July 30, 2006 from web Ukraine economy: Bouncing back. (July 28, 2006). Views Wire Eastern Europe. Retrieved July 30, 2006 from web
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