Exchange rates 1.

The monetary system international monetary system, by definiti on, a set of inter-State arrangements and practices between different economic a ctors who make them possible and supervise international economic relations. Its existence is justified by the need to control global monetary exchanges in orde r to stabilize the operation of international trade. Through time, there was ini tial application of a type in the 1870s, when German power has adopted a strict monetary system based on the gold standard, that is to say a model where By defi ning the monetary unit at a fixed weight of gold and where any money issuance is in consideration and exchange guarantee gold. This system lasted until 1914. Fo llowing World War I, it opts for the gold exchange standard. It is based on the fact that some major currencies can play the role of gold as a standard. In 1922 , only two currencies could play this role: the U.S. dollar and to a lesser exte nt, the pound sterling. Now it was possible for countries to build foreign excha nge reserves in hard currency convertible into gold. But the great crisis of 192 9 has called into question the entire system. Currency crises affecting graduall y all countries, many cases of devaluation of currencies are recorded along with a case of hyperinflation, it's known in Germany in 1926. It is therefore note t hat the international monetary system must have a stable exchange rate and suffi cient liquidity to avoid a catastrophe like the Great Depression. These premises that created a new system in 1944 from a conference in Bretton Woods, which las ted until 1971. The latter relied on four principles. Among these, the free conv ertibility of currencies, is pegged, which is denoted by the equality of the exc hange value of each currency is defined in relation to gold or the dollar, the d ollar defined in gold and fixed the International Monetary Fund. It is responsib le for ensuring compliance with rules and lend money to debtor countries the nec essary foreign exchange interventions on the foreign exchange market. Questionin g the system is based on the loss of economic confidence in the dollar. It was P resident Nixon in 1971 denouncing the gold convertibility of the dollar due to t he acceleration of the decline in stocks of U.S. Federal Reserve. This marked th e end of Bretton Woods and after attempts to design the system, led to agreement s of Jamaica of 1976 still survive. They formalize the abandonment of fixed exch ange rates for a model exchange rate, understood as a monetary system where the exchange rates of curre ncies freely varies depending on supply and demand in the market. 2. Conceptuali zation of the exchange rate to follow the concept of the exchange rate, it would be important to first define the key concept. This definition, at once simple a nd comprehensive is the site of the Ministry of Finance: "The price of the curre ncy of a country, expressed in relation to another currency, depending on supply and demand, which are influenced by fundamentals of the economy, such as differ ential interest rates, relative inflation, trade balance and the prospects for e conomic growth. " So I will try to define these various macroeconomic factors th at influence the variation of exchange rates, using the model of the exchange ra te of Canadian dollar. Canada has a floating exchange rate, that is to say that our currency is not pegged to another currency. Thus, the exchange rate is affec ted by supply and demand for Canadian dollars on the foreign exchange markets. F or example, if demand exceeds supply, the value of the dollar will go up if supp ly exceeds demand, will go down. The first economic factor that affects supply a nd demand of a currency is the interest rate differential, that is to say, the d ifference between the interest rate of domestic currency vis-À- saw the interes t rate on foreign currency. For example, if interest rates are higher in Canada than in other countries, investors will be inclined to choose to invest their fu nds in this country, which will therefore increase demand for Canadian dollar. H owever, do not neglect to take into account the expected rate of inflation. Thus , if the latter is higher,€even if interest rates are higher, this may dampen i nvestors because they can anticipate a possible deterioration of the dollar caus ed by inflation. The second factor to consider is the economic situation of our trade balance. For example, if world prices of our exports rise relative to the cost of our imports, we will win more for our exports than we pay for our import s. Thus, the more we will benefit from this exchange, as demand will be strong C

anadian dollar. The last economic factor to consider is the prospect of growth. For example, if investors have more confidence in the force's future economy Canadian, they more likely to buy Canadian assets, which will cause a subsequent increase in our dollar. However, it is important to emphasize the fact that mor e and more specialists in exchange rates are for adding that other macroeconomic factors explaining the variation in exchange rates. Thus, some authors consider it necessary to take into account non-monetary factors to explain variations in exchange rates, such as, for example, growth in international capital markets, new fiscal measures, the discovery of important natural resources or uncertainty in equity markets ... Other researchers have even claimed that exchange rates a re influenced by beliefs and expectations which are created by themselves rather than the fundamentals of economy. This is called "speculative bubble", ie, the belief that asset prices will rise, for example, would increase its demand and t herefore higher prices. 3. The international currency market will now move to th e international currency market or the Foreign Exchange (also known as the "Fore x"). This market is split into four main categories: Spot rates, futures, SWAP a nd forex derivatives. Before discussing each, it is important to mention that th e price of one currency (the symbol) can be found in two ways, either some (eg U .S. $ 1 = $ 0.96 CAD) or uncertain (eg : $ 1.04 CAD = $ 1 U.S.). The norm is tha t it uses some scoring when we have an array of exchange value, except when spea king of pounds and euros, or value is determined by a indirect quotation. Firstl y, we can define the market as the spot market where you buy / sell foreign curr ency for immediate delivery (which means two days, except between Canada and the United States, which requires a period of 24 hours). Futures contracts (forward s), when to them, mean that you buy today, but delivery will take place later. I t is important to understand that the price of futures spot rate is not that we expect in the future (in one month, three months or a year), but a mathematical application that represents the difference between the interest rates of the two countries. For example, if interest rates are very low in Japan, we must compen sate our investment in receiving, later, Japanese yen is worth more. Regarding t he SWAP exchange, it is a dual exchange transaction in which two operators of th e currency exchange today (Operation Spot rate) and will re-create same operation, in contrast, later (futures). This is often used by companies an d financial institutions that trade in the same currency but whose deadlines are not the same. It is important to mention that these operations represent 50% of trade exchange in the world. The last category of Forex what is now called deri vatives. These may include principally futures (which are like forwards, except they are traded on the Stock Exchange rather than directly between seller and bu yer), options on currencies (which gives the right, not the obligation, to sell (put option) or buy (call option) currency at a predetermined price) and SWAPS c urrency (where the exchange of interest rates in the medium or long term in two different currencies, compared to SWAP exchange of exchanging interest and the v alue of a loan or deposit at two time points in two different currencies). 4. Ca se Study: The Asian Crisis The 90 is marked by the emergence of the South and Ea st Asia in the global economic system. The Asian tigers, including Thailand,€ex perienced during this period of strong economic growth, inflation, a reasonable sound financial status and a significant infusion of foreign capital. The 1997 A sian crisis takes root in Thailand to expand in the Philippines, Malaysia, Indon esia, Hong Kong and then in Korea, then stranded on the coasts of Russia and Sou th America. By 1996, notes in Thailand bubbles in stock markets and real estate. This real estate bubble combined with accelerated pace of construction in this sector leads to a sharp drop in prices. Indeed, with the construction that is in creasing constantly, the increase in supply has no choice but to eventually redu ce the value of assets in this sector. The Bath, who like most currencies in the region, is pegged to the U.S. dollar. This results in an overvalued currency. T o sustain the value of its currency, the central bank of Thailand spends more th an $ 16 billion, half of its foreign reserves to support the price of Baht. The maintenance of the parity hard as the dollar continues to climb again makes them

attractive investments in Thailand. However, while the reserves of Thailand con tinue to flow and the failure of banks is a major problem, the government hides investors the declining situation of the country. Maintaining Bath becomes too h eavy and the government is forced to float the Bath in July 1997 to stimulate ex ports, which represent 65% of the country's economy. The result is the collapse of Bath, taking with hi m the Thai economy. In short, the financial fragility has played a major role in the crisis erupted in Thailand. Indeed, many financial institutions and enterpr ises had contracted without proper coverage, foreign currency borrowings that ma de them vulnerable to the depreciation of the currency. Moreover, it was essenti ally short-term debt while the assets were in the longer term, hence the risk of a liquidity crisis. Then, before the crisis, prices had soared on the stock and property markets and a sharp fall in asset prices was to be feared. Finally, th e allocation of credit was often inadequate, contributing to the problems of inc reasingly desperate banks and other financial institutions.