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International Business Fin

International Business Fin

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Published by: rsrao70 on May 30, 2010
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MBA- H4030 International Business Finance
1
UNIT –I
INTERNATIONAL MONETARY AND FINANCIAL SYSTEM
Objectives:
After studying this unit, you should be able to understand the:
*
Concept of International Monetary and Financial System:* Importance of international finance;* Bretton woods conference and afterwards developments;* Role of IMF and the World Bank in International business;* Meaning and scope of European monetary system.
Structure:
IntroductionCurrency terminologyHistory of International Monetary SystemInter-war years and world war IIBretton Woods and the International Monetary Fund, 1944-73.Exchange Rate Regime, 1973-851985 to date : The era of the managed floatCurrent International Financial SystemInternational Monetary Fund (IMF)The IMF’s Exchange Rate Regime classificationsFixed vs. Flexible Exchange RatesDetermination of Exchange RateWorld Bank European Monetary SystemEuropean Bank of Investment (EBI)European Monetary Union (EMU)Foreign Exchange MarketsInternational Financial MarketsSummaryFurther Readings
 
MBA- H4030 International Business Finance
2
INTRODUCTION
The international monetary system is the framework within whichcountries borrow, lend, buy, sell and make payments across political frontiers.The framework determines how balance of payments disequilibriam is resolved.Numerous frameworks are possible and most have been tried in one form oranother. Today’s system is a combination of several different frameworks. Theincreased volatility of exchange rate is one of the main economic developmentsof the past 40 years. Under the current system of partly floating and partly fixedundergo real and paper fluctuations as a result of changes in exchange rates.Policies for forecasting and reacting to exchange rate fluctuations are stillevolving as we improve our understanding of the international monetary system,accounting and tax rules for foreign exchange gains and losses, and theeconomic effect of exchange rate changes on future cash flows and marketvalues.Although volatile exchange rate increase risk, they also create profitopportunities for firms and investors, given a proper understanding of exchangerisk management. In order to manage foreign exchange risk, however,management must first understand how the international monetary systemfunctions. The international monetary system is the structure within whichforeign exchange rates are determined, international trade and capital flows areaccommodated, and balance-of-payments (BoP) adjustments made. All of theinstruments, institutions, and agreements that link together the world’s currency,money markets, securities, real estate, and commodity markets are alsoencompassed within that term.
 
MBA- H4030 International Business Finance
3
CURRENCY TERMINOLOGY
Let us begin with some terms in order to prevent confusion in reading thisunit:
A foreign currency exchange rate or simply exchange rate 
,
is the price of onecountry’s currency in units of another currency or commodity (typically gold orsilver). If the government of a country- for example, Argentina- regulates therate at which its currency- the peso- is exchanged for other currencies, thesystem or regime is classified as a fixed or managed exchange rate regime. Therate at which the currency is fixed, or pegged, is frequently referred to as its parvalue. if the government does not interfere in the valuation of its currency in anyway, we classify the currency as floating or flexible.
Spot exchange rate 
is the quoted price for foreign exchange to be delivered atonce, or in two days for inter-bank transactions. For example, ¥114/$ is a quotefor the exchange rate between the Japanese yen and the U.S. dollar. We wouldneed 114 yen to buy one U.S. dollar for immediate delivery.
Forward rate 
is the quoted price for foreign exchange to be delivered at aspecified date in future. For example, assume the 90-day forward rate for theJapanese yen is quoted as ¥112/$. No currency is exchanged today, but in 90days it will take 112 yen to buy one U.S. dollar. This can be guaranteed by aforward exchange contract.
Forward premium or discount 
is the percentage difference between the spotand forward exchange rate. To calculate this, using quotes from the previous twoexamples, one formula is:

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