Docstoc

ch ppt Slide Cross Rate

Document Sample
ch ppt Slide  Cross Rate Powered By Docstoc
					           Multinational Financial
                Management
                Alan Shapiro
                 9th Edition
              J.Wiley & Sons




Power Points by
Joseph F. Greco, Ph.D.
California State University, Fullerton
         CHAPTER 3


Defining and Analyzing The
International Monetary System
    ALTERNATIVE EXCHANGE RATE
    SYSTEMS

    I.   FIVE MARKET MECHANISMS
         A.   Freely Floating (Clean Float)
              1.     Market forces of supply
                     and demand determine
                     rates.
              2.     Forces influenced by
                     a. price levels
                     b. interest rates
                     c. economic growth
              3.    Rates fluctuate over time
                    randomly.

3
    ALTERNATIVE EXCHANGE RATE
    SYSTEMS

     B.   Managed Float (Dirty Float)
          1. Market forces set rates unless
             excess volatility occurs,
          2. Then, central bank determines
             rate.




4
    ALTERNATIVE EXCHANGE RATE
    SYSTEMS

     C. Target-Zone Arrangement
          1. Rate Determination
             a.    Market forces constrained
                   to upper and lower range of
                   rates.

             b.    Members to the arrangement
                   adjust their national economic
                   policies to maintain target.


5
    ALTERNATIVE EXCHANGE RATE
    SYSTEMS

     D. Fixed Rate System
       1. Rate determination
          a. Government maintains
          target rates.
          b. If rates threatened, central
          banks buy/sell currency.
          c. Monetary policies coordinated.




6
    ALTERNATIVE EXCHANGE RATE
    SYSTEMS

     D. Fixed Rate System (con’t)
       2. Some Government Controls:
          a. On global portfolio
             investments.
          b. Ceilings on direct foreign
             direct insurance.
          c. Import restrictions.



7
    ALTERNATIVE EXCHANGE RATE
    SYSTEMS

     E. Current System
        1. A hybrid system
           a. Major currencies:
              use freely-floating method
           b. Others move in and out
              of various fixed-rate systems




8
    A BRIEF HISTORY OF THE
    INTERNATIONAL MONETARY SYSTEM

    I. THE USE OF GOLD
     A. Desirable properties
     B. In short run: High production costs limit short-
        run changes.
     C. In long run: Commodity money insures
        stability.




9
     A BRIEF HISTORY OF THE
     INTERNATIONAL MONETARY SYSTEM

     II. The Classical Gold Standard (1821-1914)
          A.    Major currencies on gold standard.
                1.    Involved commitment by
                      nations to fix the price of
                      domestic currency in terms of a
                      specific amount of gold.




10
     A BRIEF HISTORY OF THE
     INTERNATIONAL MONETARY SYSTEM

            2.     Maintenance involved the buying
                   and selling of gold at that price.
            3.     Disturbances in Price Levels:
                   Would be offset by the price-
                   specie*-flow mechanism.

     * specie refers to gold coins



11
     A BRIEF HISTORY OF THE
     INTERNATIONAL MONETARY SYSTEM

      a. Price-specie-flow mechanism
         had automatic adjustments:
         1.)   When a balance of payments surplus
               led to a gold inflow;
         2.)   Gold inflow led to higher prices which
               reduced surplus;
         3.)   Gold outflow led to lower prices and
               increased surplus.



12
     A BRIEF HISTORY OF THE
     INTERNATIONAL MONETARY SYSTEM

     III. The Gold Exchange Standard (1925-1931)

          A.   Only U.S. and Britain allowed to
               hold gold reserves.
          B.   Others could hold both gold, dollars
               or pound reserves.




13
     A BRIEF HISTORY OF THE
     INTERNATIONAL MONETARY SYSTEM

        C.   Currencies devalued in 1931
             - led to trade wars.

        D.   Bretton Woods Conference
             - called in order to avoid future
             protectionist and destructive
             economic policies




14
     A BRIEF HISTORY OF THE
     INTERNATIONAL MONETARY SYSTEM

     IV. The Bretton Woods System (1946-71)
       A. The Bretton Woods Agreement
          1. U.S.$ was key currency;
             valued at $1 = 1/35 oz. of gold.
          2. All currencies linked to that price in
             a fixed rate system.
          3. Exchange rates allowed to fluctuate
             by 1% above or below initially set
             rates.
15
     A BRIEF HISTORY OF THE
     INTERNATIONAL MONETARY SYSTEM

      B. Collapse, 1971
         1. Causes:
            a. U.S. high inflation rate
            b. U.S.$ depreciated sharply.




16
     A BRIEF HISTORY OF THE
     INTERNATIONAL MONETARY SYSTEM

     V. Post-Bretton Woods System (1971-Present)
          A.    Smithsonian Agreement, 1971
               US$ devalued to 1/38 oz. of gold.
               By 1973: World on a freely
               floating exchange rate system.




17
     A BRIEF HISTORY OF THE
     INTERNATIONAL MONETARY SYSTEM

      B. OPEC and the Oil Crisis (1973-1974)
         1.   OPEC raised oil prices four fold;
         2.   Exchange rate turmoil resulted;
         3.   Caused OPEC nations to earn
              large surplus B-O-P.
         4.   Surpluses recycled to debtor nations
              which set up debt crisis of 1980’s.




18
     A BRIEF HISTORY OF THE
     INTERNATIONAL MONETARY SYSTEM

      C. Dollar Crisis (1977-78)
         1. U.S. B-O-P difficulties
         2. Result of inconsistent monetary
            policy in U.S.
         3. Dollar value falls as confidence
            shrinks.




19
     A BRIEF HISTORY OF THE
     INTERNATIONAL MONETARY SYSTEM

      D. The Rising Dollar (1980-85)
         1.    U.S. inflation subsides as the Fed
               raises interest rates
         2.    Rising rates attracts global capital to
               U.S.
         3.    Result: Dollar value rises.




20
     A BRIEF HISTORY OF THE
     INTERNATIONAL MONETARY SYSTEM

      E. The Sinking Dollar (1985-87)
         1.   Dollar revaluated slowly downward;
         2.   Plaza Agreement (1985)
              G-5 agree to depress US$ further.
         3.   The Louvre Agreement (1987)
              G-7agree to support the falling US$.




21
     A BRIEF HISTORY OF THE
     INTERNATIONAL MONETARY SYSTEM

     F. Recent History (1988-Present)
        1.   1988 US$ stabilized
        2.   Post-1991 Confidence resulted in
             stronger dollar
        3.   1993-1995 Dollar value falls




22
     THE EUROPEAN MONETARY
     SYSTEM

     I. INTRODUCTION
      A. The European Monetary System (EMS)
         1.    A target-zone method (1979)
         2.    Close macroeconomic policy
               coordination required.




23
     THE EUROPEAN MONETARY SYSTEM

      B. EMS Objective:
         to provide exchange rate stability to all
         members by holding exchange rates within
         specified limits.




24
     THE EUROPEAN MONETARY SYSTEM

      C. European Currency Unit (ECU)
      a “cocktail” of European currencies with
      specified weights as the unit of account.

         1. Exchange rate mechanism (ERM)
            each member determines mutually agreed
            upon central cross-rate for its currency.


25
     THE EUROPEAN MONETARY SYSTEM

       2. Member Pledge:
          to keep within 15% margin above or below
          the central rate.

     D. EMS ups and downs
       1. Foreign exchange interventions failed due
          to lack of support by coordinated monetary
          policies.


26
     THE EUROPEAN MONETARY SYSTEM

      2. Currency Crisis of Sept. 1992
         a. System breaks down
         b. Britain and Italy forced to withdraw from
            EMS
      E. Failure of the EMS
         members allowed political priorities
         to dominate exchange rate policies


27
     THE EUROPEAN MONETARY SYSTEM

      F. Maastricht Treaty
         1. Called for Monetary Union by 1999
            (moved to 2002)
         2. Established a single currency: the
            euro
         3. Calls for creation of a single central EU
            bank
         4. Adopts tough fiscal standards



28
     THE EUROPEAN MONETARY SYSTEM

     I. Costs / Benefits of A Single Currency
       A. Benefits
          1. Reduces cost of doing business
          2. Reduces exchange rate risk
       B. Costs
          1. Lack of national monetary flexibility.




29

				
DOCUMENT INFO
Shared By:
Categories:
Tags: Slide, Cross, Rate
Stats:
views:179
posted:12/18/2010
language:English
pages:29
Description: ch ppt Slide Cross Rate