Financial environment chapter Three

FINANCIAL ENVIRONMENT Chapter Three

Financial Environment Chapter Three

• 1. Historical Role of the US Dollar

• 2. The Gold Standard

• 3. The Interwar Years

• 4. Development of the Current International Monetary System

• 5. Fixed versus Floating Exchange Rates

• 6. Foreign and Foreign Exchange Rates

• 7. Balance of Payments

1. Historical Role of the US Dollar

• absence of a universal currency

• exchange of the dollar based on gold ounce

• common denominator in world trade

• the dollar in the 70’s, 80’s and 90’s.

2. The Gold Standard

• par values

• three major features

• system of fixed exchange rates
• limited rate of growth in a country’s money supply
• automatic adjustment tool

• problems

3. The Interwar Years 1919-1939

• the English pound sterling position

• the US dollar position

4. Development of Today’s International Monetary System

• The Bretton Woods Conference in New Hampshire in 1944

• ruled out return to the gold standard
• free floating exchange rates could not work
• need for a monetary system to recognize that exchange rates were both national and international

4. Development of an International Monetary System (cont)

• The International Monetary Fund (IMF)

• to promote international monetary cooperation
• to facilitate expansion and balanced growth of international trade
• to promote exchange stability
• to assist in establishment of a multilateral system of payments
• to give members temporary use of availability of funds
• to shorten duration and lessen degree of disequilibrium

4. Development of an International Monetary System (cont)

• The International Bank for Reconstruction and Development

• The World Bank

• Twin Crises

• oil prices
• foreign debt

5. Fixed versus Floating Exchange Rates

• problems
• free (clean) float
• managed float
• Exhibit 3-1 “Foreign Exchange Rate Fluctuations over Past 30 Years”

• Currency Blocs

6. Foreign Exchange and Foreign Exchange Rates

• Purchasing Power Parity (PPP)

• Exhibit 3-2 “ The Big Mac Index”

• Forecasting Exchange Rate Fluctuation

• Exhibit 3-3 “Factors Influencing Foreign Exchange Rates”

• Coping with Exchange Rate Fluctuations

• Spot versus Forward Foreign Exchange

• Exhibit 3-4 “Exchange Rates Fri May 23, 1997

• Exchange Rate Pass Through

7. Balance of Payments

• Exhibit 3-5 US Balance of Payments 1980-1996
• trade balance
• current account balance
• capital account

• Direct Investment

• Portfolio Investment

• The Internal and External Adjustments