International Finance Flashcards
What is the IMS
International Monetary System
What does the IMS do
determines foreign exchange rates,
accommodates international trade and capital flows,
adjusts balance-of-payments
What are the two main categories of the IMF
Floating - supply and demand determines the value of currency
fixed - value of currency relative to gold, or a basket of currencies
What is a soft peg
stable value against another currency
what is a hard peg
legal use of another country’s currency or a requirement to maintain account with foreign currency equal to amount of domestic currency in circulation
What is devaluation of a currency
a drop in foreign exchange value of a currency that is pegged.
opposite: revaluation
what is depreciation, weakening, or deterioration of a currency
drop in a foreign exchange value of currency that is floating
opposite: appreciation or strengthening
what is soft or weak currency
currency that is expected to devalue or depreciate relative to major currencies
what are strong or hard currencies
currency that is expected to revalue or appreciate relative to major trading currencies
What can a weak currency cause
benefits a country’s exports
spurs inflation
creates high volatility in investments
lead to a flight out of the currency to another currency
difficulty repaying debt
what are some benefits of a fixed rate regime
promotes international trade, promotes foreign investments, promotes low inflation
What is non-sterilized intervention
direct market intervention to weaken/strengthen a domestic currency requires the sale/purchase of a domestic currency on international markets
what is sterilized intervention
inflationary pressure my be sterilized by simultaneously issuing domestic government debt with the direct market intervention
What is a currency board
When a country’s central bank always commits to back it monetary base entirely with foreign reserves
What is dollarization
use of the US dollar as the official currency of the country
what are attributes of the “ideal currency”
“The Impossible Trinity”
Exchange rate stability
Full financial integration
monetary independence
What is exchange rate stability
traders and investors are relatively more certain of foreign exchange value
what is full financial integration?
complete freedom of monetary flows so traders and investors can more easily move funds from one country to another to exploit economic opportunities
what is monetary independence
monetary and interest rate policies can be set by each country individually to achieve desired national economic policies - combats inflation, recession, and unemployment
What is “De jure”
a country’s own identification of exchange rate regimewh
what is “de facto”
observable exchange rate regime
What does a foreign exchange market provide
institutional structure through which the money of one country is exchanged - rates and settlement
What are the two tiers in the foreign exchange market?
Interbank - wholesale
Retail
Who are the five broad categories of participants in the foreign exchange market
Banks and nonbank foreign exchange dealers
foreign exchange brokers
firms and individuals
speculators and arbitrageurs
central banks and treasuries
What is BOP
Balance of Payments - International Business Transactions
Is are the three primary sub accounts of a BOP
Current Account
Capital Account
Financial Account
