Chapter 8 The international monetary system and financial forces

Record of a country's transactions with the rest of the world. It revels the demand for the country's currency. It also helps managers predict what sort of changes in the economic environment might develop in the country

- Balance of payments

An international reserve asset established by the IMF; the unit of account for the IMF and other international organizations. It's value is based on a four currencies: euro, yen, pound sterling, and US dollar.

- Special drawing rights ( SDR )

The exchange rates between two currencies for delivery within two business days

- Spot rate

An approach that analyzes data for trends and then projects these forward

- Technical analysis

Monetary system consists of institutions, agreements, rules, and processes that follow for the payments, currency exchange, and movements of capital across international borders that are required by international transactions.

- The international monetary system

A national currency that is also a reserve currency will eventually run a deficit, which leads to lack of confidence in the reserve currency and a financial crisis. That is, the more dollars foreigners held, the less confidence they had in the currency.

- Triffin paradox

Tax charged on the value added to a good as it moves through production from raw material to final purchaser

- Value-added tax (VAT)

A currency used as a vehicle for international trade or investment

- Vehicle currency

Indirect tax levied on passive income (income such as dividends, royalties, and interest) that the corporation would pay out to nonresidents, people, or companies in another tax jurisdiction

- Withholding tax

The process of buying and selling instantaneously to make profit with no risk

- Arbitrage

Lowest priced sell order that is currently in the market.

- Ask price

International organization of central banks that exists to build cooperation among them to foster monetary and financial stability. It is the oldest international financial institution in the world. It has 4 main functions: a banker for central bank, a forum for international monetary cooperation, a center for research, and an agent or trustee for government in various international financial arrangements.

- Bank for International Settlements ( BIS )

Highest priced buy order that is currently in the market

- Bid price

The IMF Articles of Agreement contained the rules for this international monetary system in place from 1945 to 1971, with par value based on gold and the U.S. dollar. Also called the gold exchange standard and the fixed rate system, which served as the basis of the international monetary system

- Bretton Woods System

A "peg" or fixed-rate relationship where exchange rate fluctuations are allowed within a narrow band of less than 1%.

- Conventional fixed peg arrangement

Currency readjusted to maintain fluctuation margins around a central rate

- Crawling band

A currency is readjusted periodically at a fixed, preannounced rate or in response to changes in indicators

- Crawling peg

A legislated commitment to exchange domestic currency for a specific foreign currency at a fixed rate.

- Currency board arrangement

Assumption that current market prices fully reflect all available relevant information in the environment. This also suggest that forward exchange are the best possible predictor of future spot rates because they will have taken into account all the available information.

- Efficient market approach

One country adopts the currency of another or a group of countries adopt a common currency. An example of the first in the U.S dollar use in El Salvador, Panama, and Ecuador. An example of the second is the European union's euro being used as shared currency in 17 EU member-countries.

- Exchange arrangement with no separate legal tender.

Policies that address the collecting and spending of money by the government

- Fiscal policies

The relationship between real and nominal interest rates: The real interest rate will be the nominal interest rate minus the expected rate of inflation rr = (rn) - I

- Fisher effect

Specific currency exchange equivalence upheld by government.

- Fixed exchange rate

Rate that are allowed to float against other currencies and are determined by market forces

- Floating currency exchange rates

Trading market for currency contracts deliverable 30, 60, 90, or 180 days in the future

- Forward currency market

The exchange rate between two currencies for delivery in the future, usually 30, 60, 90, or 180 days

- Forward rate

Exchange rate prediction based on econometric models that attempt to capture the variables ans their correct relationships

- Fundamental approach

Sir Issac Newton established the price of gold in terms of British currency at 3 pound, 17 shillings, 10.5 pence per ounce. The use of gold at an established number of units per currency

- Gold standard

Direct tax on personal and corporate income

- Income tax

Rely on the market. There may be interventions, yet they are conducted to moderate the rate of change rather than to established the currency's level.

- Independently floating exchange rates

Determines the real cost of borrowing in capital markets. it encourage borrowing (debt). It causes the cost of goods and services produced in a country to rise, and thus goods ans services become less competitive globally.

- Inflation rate

Plays a central institutional role in the international monetary system by providing the rules of the international monetary system "game."

- International Monetary Fund ( IMF)

Concept that the interest rate differentials for any two currencies will reflect the expected change in their exchanges rate

- International fisher effect

A currency used by a country to intervene in the foreign currency exchange markets, often to buy (strengthen) its own currency

- Intervention currency

The 1976 IMF agreement that allows flexible exchange rates among members, while condoning central bank operations in the money markets to smooth out volatile periods.

- Jamaica Agreement

Concept that in an efficient market, like products will have like prices

- Law of one price

A monetary authority actively intervenes on the exchange market without specifying or marking public its goals and targets

- Managed floating with no preannounced path for the exchange rate

Government policies that control the amount of money in circulation and its growth rate

- Monetary policies

No actual trading floor; trades are done electronically.

- Over the counter (OTC)

A peg arrangement in which the exchange rate fluctuations are allowed to be greater than 1%

- Pegged exchange rate within a horizontal band

PPP shows the number of units of a currency required to buy the same basket of goods and services in the foreign market that one dollar would buy in the US or other home market EP($/E)=$P

- Purchasing power parity (PPP)

Assumption that the unpredictability of factors suggests that the best predictor of tomorrow's prices is today's prices

- Random walk hypothesis

In foreign exchange, the dollar as the base currency, a currency that is quoted as dollars per unit of currency instead of in units of currency per dollar; also known as direct quote.

- Reciprocal currency

Assets held by the central bank, used to back up government liabilities.

- Reserves