Quiz 1 Flashcards
A well-known term in
today’s world and it is also known as international finance. It
means financial management in an international business environment. It is different because of the different currencies of different countries, dissimilar political situations, imperfect markets, and diversified opportunity sets
International Financial Management
the institutional framework within which
international payments are made, movements of capital are
accommodated, and exchange rates among currencies are
determined.
• It is a complex whole of agreements, rules, institutions, mechanisms, and policies regarding exchange rates, international payments, and the flow of capital.
International Monetary System
Before the 1870s, many countries had
bimetallism, that is, a double standard in that
free coinage was maintained for both what?
Gold and silver
What year is Bimetallism?
Before 1875
What is the year range of Classical Gold Standard?
1875-1914
The first full-fledged gold standard, however,
was not established until 1821 in what country?
Great Britain
It was effectively on the gold standard
beginning in the 1850s and formally adopted
the standard in 1878.
France
The majority of countries got off gold in 1914
when this event broke out
World war I
An international gold standard can be said to
exist when, in most major countries,
(i) gold alone is assured of unrestricted coinage,
• (ii) there is two-way convertibility between gold
and national currencies at a stable ratio, and
• (iii) gold may be freely exported or imported
a monetary
principle stating that when there are two
forms of commodity money in circulation,
which are accepted by law as legal tender and
have the same face values.
Gresham’s Law
The price-specie flow mechanism is a model developed
by David Hume to explain how trade
imbalances can be automatically adjusted
under the gold standard.
Price-Specie-Flow Mechanism
What is the year duration of Interwar Period?
1915-1944
During this period, countries widely
used this of their currencies as a means of gaining advantages
in the world export market.
Predatory Depreciation
which replaced Great
Britain as the dominant financial power?
United States
He played a key role in restoring the gold standard in 1925. Besides
Great Britain, such countries as Switzerland,
France, and the Scandinavian countries
restored the gold standard by 1928.
Winston Churchill
In July 1944, representatives of 44 nations
gathered in this place to discuss and design the post-war
international monetary system
Bretton Woods, New Hampshire
The agreement of Bretton Woods was subsequently ratified by
the majority of countries to launch the this in
1945.
International Monetary Fund
What year is the duration of Bretton Woods System?
1945-1972
What is the other name of World Bank?
International Bank for Reconstruction and Development
The British delegates led by John Maynard
Keynes proposed an international clearing
union that would create an international
reserve asset called
Bancor
In 1963, President John Kennedy imposed the
this on U.S. purchases of foreign securities in order to
stem the outflow of dollars.
Interest Equalization Tax (IET)
In August 1971, President Richard Nixon
suspended the convertibility of the dollar into
gold and imposed what?
10 percent surcharge
In an attempt to save the Bretton Woods
system, these countries met at the Smithsonian
Institution in Washington, D.C., in December
1971. What is the name of the countries?
Group of Ten
What is this agreement, according to which
• (i) the price of gold was raised to $38 per ounce,
• (ii) each of the other countries revalued its
currency against the U.S. dollar by up to 10
percent, and
• (iii) the band within which the exchange rates
were allowed to move was expanded from 1
percent to 2.25 percent in either direction.
Smithsonian Agreement
European and Japanese
currencies were allowed to float, completing
the decline and fall of the Bretton Woods
system. When is it?
March 1973
What is the year of duration of the Flexible Exchange Rate Regime
1973-Present
• Flexible exchange rates were declared
acceptable to the IMF members, and central
banks were allowed to intervene in the
exchange markets to iron out unwarranted
volatilities.
• Gold was officially abandoned (i.e.,
demonetized) as an international reserve asset.
Half of the IMF’s gold holdings were returned to
the members and the other half were sold, with
the proceeds to be used to help poor nations.
• Non-oil-exporting countries and less-developed
countries were given greater access to IMF funds.
Jamaica Agreement
In September 1985, the so-called G-5
countries met at the Plaza Hotel
in New York and reached what became known
as the PlazaAccord. What are the G-5?
France, Japan, Germany, the U.K.,
and the United States
The meeting produced the this,
according to which:
• The G-7 countries would cooperate to achieve
greater exchange rate stability.
• The G-7 countries agreed to more closely
consult and coordinate their macroeconomic
policies.
Louvre Accord
• The Louvre Accord marked the inception of
this under which the
G-7 countries would jointly intervene in the
exchange market to correct over- or
undervaluation of currencies
Managed-Flow System
in fact, actual, in
practice
De facto arrangement
by law, stated in law
(fixed exchange rate)
De jure arrangement
use another currency as their legal
form of money.
● No official money but instead used currency of
another country as their legal tender.
● Interest rate are not controlled
● Currency union - isang currency lang ang gamit.
EXCHANGE ARRANGEMENT WITH NO SEPARATE
LEGAL TENDER
exchange domestic currency to
foreign currency at a fixed exchange rate.
● Involves foreign currency backing
● Limited monetary control
Currency Board
country fixes its currency
exchange rate to another currency or basket of
currencies.
● Basket of currencies - not focused on one
currency (iba-iba)
● Direct intervention - buying and selling of
foreign exchange rate
● Indirect intervention - adjusting interest rates
Conventional Peg
focus on stability
● Exchange rate exhibits a high degree of stability
over a sustained period.
Stabilized arrangement
stay within 2 percent
margin
Limited Fluctuation
• identified using statistical techniques
● Could be anchored to a single currency or
basket of currencies.
Not Floating
allow gradual adjustments in the
value of a currency overtime
(appreciation/depreciation) against reference
currency.
● Have de jure commitment
Crawling Peg
fixed rate and
inflation based.
Predetermined Adjustment
What are the THREE BROAD CATEGORIES OF EXCHANGE RATE
ARRANGEMENTS (ERR?
- Hard pegs - less flexible
- Soft pegs - intermediate
- Floating - more flexible
degree of exchange rate rigidity (to
what extent)
Spectrum
- EXCHANGE ARRANGEMENT WITH NO
SEPARATE LEGAL TENDER - a country has no
currency and adopting other countries
currency. (formal dollarization)
Downside:
● Surrendering monetary policy control
● No control on money supply
Hard Pegs
- EXCHANGE ARRANGEMENT WITH NO
SEPARATE LEGAL TENDER - a country has no
currency and adopting other countries
currency. (formal dollarization)
Downside:
● Surrendering monetary policy control
● No control on money supply
Hard Pegs
fixed rate regime supported by
legislation. (fixed lang exchange rate kahit tumaas o
bumaba yung economy)
● Domestic currency will be issued only against
foreign exchange
● Some flexibility may offer
● Fixed exchange rate requires the central bank to
have enough reserves.
● Limits the central banks freedom to adjust the
supply of domestic currency in the economy.
Currency Board
● Attempt to mix the stability of a peg and
adjustments that come with floating rates.
● Countries may peg their currency to another
currency or a basket of currencies.
● There is no explicit legal commitment.
Soft Pegs
What are the different types of soft pegs?
• CONVENTIONAL PEG
• STABILIZED ARRANGEMENT
• CRAWLING PEG
• CRAWLIKE ARRANGEMENTS
• PEGGED EXCHANGE RATE WITHIN HORIZONS
BANDS
• OTHER MANAGED ARRANGEMENTS
A type of government intervention where they are buying and selling of foreign
currency in the market.
Direct Intervention
A type of Government intervention where they adjust interest rates and
impose foreign exchange regulations
Indirect Intervention
determined by market demand and
supply.
● Central bank intervenes (limited interventional)
● Maintain independent monetary policies
● Fluctuate freely based on supply and demand in
the foreign exchange market.
● No guarantee or predictable path for exchange
rate.
● Limited fluctuation
Floating
specific type of floating
● Stricter criteria regarding government
intervention
● Intervention is very rare
Free Floating
- Known as balance of international payments
- Record keeping system for a countries
economic transaction - Ginal financial statement
Balance of Payments (BOP / BoP)
Who is involve?
- Transaction made by residents:
- Individuals
- Businesses (Firms)
- Government
What kind of transactions?
- Payment
- Receipt
2 major components?
- Current account
- Capital account
Focuses on net trade of goods and services
Current Account
Goods
Ex: exports and imports
Exports - goods a country sell to toher country ( money
coming in)
Visible Trade
goods a country buys from other country
(mey going out)
Imports
difference of exports and imports
Balance of Trade
services
Ex: tourism, transportation, financial services
Invisible Trade
(one-way transactions)
Ex: foreign aids/grants, worker’s remittances
Unilateral Transfers/transfer payments
Ex: compensation of employees, interest,
dividends, and profits, rent
Income receipts and payments/factor
payments
a. Loans to and from borrowings from abroad
b. Investment to or from abroad
- Direct investment
- Portfolio investment
c. Changes in foreign exchange reserves
- Increase / decrease in reserves
Capital Account
