International management module 8

Causes of Exchange Rate Movement

-Monetary policies -Fiscal policies -Law of one price concept -Arbitrage -Fisher effect -international fisher effect -Purchasing power parity

What is known to be the most discreet financial institution in the world?

Bank for International Settlements

Sir Isaac Newton established the price of gold in 1717 in terms of British currency.

True

The Central Reserve/National Currency Conflict

U.S. dollar most used central reserve since end of WWII

A fixed peg currency arrangement means that

a country's exchange rates fluctuate around a fixed rate within a narrow band

The Triffin paradox refers to what occurs when

a national currency that is also a reserve currency runs a deficit

Most significantly for the international manager, the balance of payments reveals

demand for a country's currency.

Triffin paradox

national currency that is also a reserve currency will eventually run a deficit, leading to lack of confidence in the reserve currency and a financial crisis.

Exchange rate fluctuations are best described as

not yet fully understood by economists

A value-added tax is actually a sales tax that is

paid in stages along the process from raw materials to consumer

SDR refers to

special drawing rights, an international reserve asset

The Gold Standard

•A monetary system that defines the value of its currency in terms of a fixed amount of gold.

BOP (balance of payments)

•A record of a country's transactions with the rest of the world. •Shows flow of capital in and out of the country. •Reveals demand for a country's currency.

Reserves

•Assets held by a nation's central bank, used to back up government liabilities.

Why Foreign Currency Exchange Occurs

•Buyers and sellers want to do business in own currency to avoid risk that accompanies currency exchange.

Deficits and Surpluses in BOP Accounts

•Current account deficit may mean economic problems such as inflation OR that demand into the country exceeds outward flows.

Floating Exchange Rates

•Determined by supply and demand that allow currency values to float against one another. •Jamaica Agreement established flexible exchange rates among IMF members.

Inflation and Interest Rates

•Determines real cost of borrowing in capital markets. •Interest rates rise with inflation.

Exchange Rate Forecasting

•Efficient market approach is assumption that current market prices fully reflect all available relevant information. •Random walk hypothesis is assumption that the unpredictability of factors suggests that the best predictor of tomorrow's prices is today's prices. •Fundamental approach is based on econometric models that attempt to capture the variables and their correct relationships. •Technical analysis analyzes date for trends and then projects these trends forward.

Current Currency Arrangements (IMF 8 types)

•Exchange arrangement with no separate legal tender. •Currency board arrangement. •Conventional fixed-peg arrangement. •Stabilized arrangement: Pegged exchange rate within a horizontal band. •Crawling peg. •Crawling band. •Managed floating. •Free floating exchange rates.

Currency Exchange Controls

•Governments can control currency exchange of their currency and other currencies within their borders. •Motivation is to manage foreign reserves.

The Bretton Woods System

•The international monetary system in place from 1945 to 1971, with par value based on gold and the U.S. dollar.

Fluctuating Currency Values

•The major currencies are allowed by their central banks to fluctuate freely against each other. •U.S. dollar •British pound sterling •Japanese yen •Euro

Taxation

•Three types of taxation: 1.Income tax 2.Value-added tax (VAT) 3.Withholding tax

Fixed exchange rates

•currency's value is tied to the value of another currency or gold.

Par value

•stated value:

Special drawing rights (SDR):

•the unit of account for the IMF and other international organizations.