International Finance - Monetary Assets
Monetary assets are cash in possession of a corporation, country, or a company. There is always some demand and an equivalent amount of supply for each country’s currency. The cash in hand determines the strength of an economy.
Monetary assets have a dollar value that will not change with time. These assets have a constant numerical value. For example, a dollar is always a dollar. The numbers will not change even if the purchasing power of the currency changes.
We can understand this concept by contrasting them against a non-monetary item like a production facility. A production facility’s value – its price denoted by a number of dollars – may fluctuate in future. It may lose or gain value over the years. So a company owning the factory may record the factory as being worth $500,000 one year and $480,000 the next. But, if the company has $500,000 in cash, it will be recorded as $500,000 every year.
In other words, monetary items are just cash. It can be a debt owed by an entity, a debt owed to it, or a cash reserve in its account.
For example, if a company owes $40,000 for goods delivered by a supplier. It will be recorded at $40,000 three months later even though, the company may have to pay $3,000 more because of inflation.
Similarly, if a company has $300,000 in cash, that $300,000 is a monetary asset and will be recorded as $300,000 even when, five years later, it may be able to only buy $280,000 worth of goods compared to when it was first recorded five years ago.
Demand and Supply of Currency in Forex Market
The demand for currencies in forex markets arise from the demand for a country’s exports. Also, speculators who are looking for a profit relying on the changes in currency values create demand.
The supply of a particular currency is derived by domestic demands for imports from the foreign nations. For example, let us suppose the UK has imported some cars from Japan. So, UK must pay the price of cars in Yen (¥), and it will have to buy Yen. To buy Yen, it must sell (supply) Pounds. The more the imports, the greater will be the supply of Pounds onto the Forex market.