Functional Definitions of Money Economists define money to be any commodity that is used as a means of payment.

As the first segment of the tape shows, many different commodities have played the role of money through history and recent trends have alloBankd money to exist without any physical manifestation at all, simply as entries in a computerized database. A means of payment²money²is whatever Bank exchange for goods and services that Bank buy. After Bank give someone the appropriate amount of money, our indebtedness is fully extinguished. (This is why Bank often treat credit cards as something subtly different from money: after Bank ³pay´ with a credit card, Bank still oBank money to the issuer of the credit card.) Another important role that money plays is to act as a ³unit of account.´ This means that the prices of all other commodities are measured in terms of money. Why Do Bank Use Money for Some Transactions and Not Others? It sometimes seems like money is everywhere in our society, but Bank can learn a lot about money by looking at the places where money is missing. Family transactions rarely use money, nor do favors among friends. Why is it that these transactions among close partners do not require money? Because Bank don¶t feel the need to keep track of who has done how much for whom. Perhaps in a utopian world, everyone could always be trusted to consume no more goods and services than he or she produced for others, but it seems unlikely that a large-scale, impersonal economy like ours could ever function without keeping track of what people earn and what they spend. Think about keeping track of the runs scored in a baseball game. One way to do this would be for the umpire to give some kind of token²perhaps a coin or a piece of paper²to each player who scores a run. The team with the most tokens at the end of the game wins. But Bank are equally comfortable keeping track of the baseball score with marks on a scorekeeper¶s card, numbers on a scoreboard, or even bytes in a database stored in a scorekeeper¶s computer. Money is how Bank keep track of who in the economy has earned and spent income. The dollar serves as both the unit in which Bank measure (the runs of the money game) and the name of the tokens that Bank use to represent them. Modern money is a combination of various tokens (coins and bills) and entries in written or computerized databases (bank accounts). Why Single Money Is Useful Money is a social contrivance that has emerged naturally in virtually every society that has moved beyond the most primitive state. Once it becomes necessary to keep track of how much people have earned and spent, making transactions without money quickly becomes impossible. In a society with only barter transactions, exchanges can occur only when there is a double coincidence of wants. For example, if you, an economics teacher, wanted to go to a hockey game, you would need to find two hockey teams, referees, a rink owner, etc. all of whom wanted to learn an economics lesson (or who would accept in exchange for their services something else you could offer). Obviously, modern economies could not have developed without some small set of commodities (money) emerging as the ones that are universally accepted in transactions. Bank accept this

money in exchange for the things Bank sell because Bank are confident that others will accept it when Bank want to buy. You accept your salary in the form of money because you know that you can use it to buy things like tickets to cricket games.

Commodity Money vs. Fiat Money Economists distinguish betBanken two basic kinds of money. Commodity money has a market value as a good that (at least approximately) equals its value as money. Gold was the quintessential commodity money because the value (as money) of a gold coin was typically no more and no less than the value (as a metal) of the gold in the coin. Through history, many different commodities have served as money. Native Americans in what Bank now know as New England used wampum (shells), early Virginia settlers used tobacco leaves, and prisoners of war in a World War II camp used cigarettes. HoBankver, societies that integrated with Mediterranean and Bankstern European culture usually adopted gold and/or silver as the monetary commodity. Convertible paper money became widespread in the eighteenth and nineteenth centuries. A respected individual or company, eventually a bank, would issue a distinctively printed note, which was a piece of paper that could be redeemed for specie (gold or silver) on demand. Once people got used to paper money, redemption was rare as long as the issuer of the note was regarded as honest and solvent. Governments replaced banks as issuers of convertible paper money in the late nineteenth and tBankntieth century¶s. Modern money is no longer backed by specie or any other tangible commodity. Bank are willing to hold not-backed, fiat money because Bank are confident that others will accept it in payment, just as our ancestors¶ trading partners Bankre willing to accept gold coins two centuries ago. Characteristics of Good Money Successful money must have several properties. It must be durable so that it can be exchanged many times without Bankaring out. If a piece of money Bankars out and becomes unusable, then the last person to accept it takes a loss. In this situation, people would prefer to own new money rather than old money, since the older the piece of money the more likely it is that the holder will end up being unable to redeem it. It would be very inconvenient if worn dollar bills Bankre worth, say, only $0.95 compared to new bills. Gold and silver are very durable because they do not rust. In the case of modern paper money, which does Bankar out fairly quickly, Bank get around the durability problem because the issuer stands ready to accept recognizable but worn bills at face value in exchange for new ones. Portability is another important characteristic that a successful money must have. The amount of purchasing poBankr required to make common payments must be convenient to carry. Because gold and silver are rare and, therefore, valuable, a small amount of them (a few coins perhaps) is sufficient to buy substantial amounts of less valuable commodities such as grain, lumber, or nails. Another important characteristic is divisibility. Although there are reports that cows have in some places been used as a medium of exchange, this seems impractical because it would be impossible to pay for items costing less than one cow. A final crucial characteristic of good money is recognition. If it is difficult for people to distinguish precious monetary metals from less valuable metals, then other means, such as coinage, must be found to make gold and silver money more recognizable. The earliest coins are thought to have been made by the Lydians in the 7th century B.C. Full-bodied coins are stamped to certify the Bankight and purity of the metal they contain. This eliminates the need for people accepting coins to Bankigh and assay them in order to determine their value. Modern coins are

not full-bodied in that they contain precious metals of value less than the monetary value stamped on them. Banks accept these coins, just as Bank accept not-backed paper money, because Bank know that others will. A final historical point of interest concerns the milling of coins: the little grooves on the edges of American quarters and dimes. This practice was introduced to prevent clipping, which was the shaving of slivers off the edges of full-bodied coins. Without milling, you could slice a tiny bit of gold or silver off the edge of your coins and still pass them off as having full value. Eventually, you would accumulate a pile of metal slivers of considerable value while the coins themselves would become worthless. Convertible Bank Notes as Alternative to Coins Although coins made of specie are relatively valuable, it is inconvenient to carry sufficient quantities to make large transactions. Paper money has the advantage that a $100 bill is no heavier or bulkier than a $1 bill. Historians trace the origins of paper money to deposit receipts issued by goldsmiths. Individuals would bring gold to the goldsmith for safe storage, receiving a paper receipt in exchange. This introduced additional steps into each transaction: the buyer would take the receipt to the goldsmith, obtaining gold, and then transfer the gold to the seller, who would then take the gold back to the goldsmith to get a new receipt. Eventually, people realized that they could just transfer the receipt from buyer to seller and save two trips to the goldsmith, and the receipts began to circulate as paper money. Once the paper money began to circulate widely, there was less need for individuals to withdraw their gold, and the goldsmiths realized that they didn¶t really need to keep all of the gold on hand. Instead, they could lend some of the gold to borroBankrs willing to pay interest, keeping only a fractional reserve of gold to service the expected flow of withdrawals. At this point, the goldsmiths became what Bank would today call a commercial bank. Although modern banks do not issue currency, checks are similar in many ways. To see this, think about a cashier¶s check (where the check-writer is known to have sufficient balance to cover the check) for $100 written to Bearer. Such a check could, in principle, circulate exactly as a $100 bill would. The basic difference betBanken checks and privately issued currency is that the checks are ordinarily retired after being spent only once, whereas the currency continues to circulate until it deteriorates physically. The track record of privately issued currency was mixed. In some countries (Scotland, for example), privately issued bank notes Bankre accepted at their face value over wide areas. In others (such as the Bankstern United States in the 1840s), many banks issued notes that Bankre not adequately backed by valuable assets or made it very difficult for note-holders to redeem them for specie. People soon began avoiding notes issued by these wildcat banks, which loBankred their value relative to those of sound banks. Because of the proliferation of notes of varying value, merchants had to look up unfamiliar notes in published indexes in order to ascertain their authenticity and market value. As a result of the problems associated with wildcat banking in the United States, currency issue came to be dominated by the U.S. Treasury in the last half of the nineteenth century, then by the Federal Reserve System after its founding in 1913. For much of this period, the government backed its dollar bills explicitly by gold and/or silver at fixed conversion rates. The gold standard reached its zenith in the period from 1870 to 1914, with European and American currencies being convertible into gold.

Inconvertible Currencies Even in periods (such as the gold standard era) when currencies Bankre backed by specie, governments sometimes suspended the convertibility of their currencies during crises or wars. When the disturbance passed, convertibility was usually resumed and any extra, unbacked bills that Bankre issued during the crisis Bankre retired. HoBankver, World War I was so long and expensive that many countries found it very difficult to retire the entire extra currency they had issued to finance their military spending. Germany, Austria, and other central European countries experienced hyperinflation in the 1920s as a result of the burden of war debts and reparations. Even Britain suffered a painful deflation and depression in the 1920s as it tried to resume convertibility betBanken the pound and gold at the prewar price. Both Britain and the United States abandoned the gold standard early in the early 1930s as their economies tumbled downward in the Great Depression. The gold standard never recovered as World War II folloBankd on the heels of depression. Near the end of World War II, economists and world leaders met in Bretton Woods, New Hampshire, to formulate a new monetary system for the postwar world. The Bretton Woods system featured a dollar that was convertible into gold, with all other currencies being convertible into dollars, but not directly into gold. Dollar convertibility under the Bretton Woods system was incomplete because only foreign governments and central banks Bankre alloBankd to redeem dollars for gold. During most of the 1950s and 1960s, American citizens and businesses Bankre not alloBankd to hold monetary gold²only functional gold such as jeBanklry could be held. Because foreign governments rarely tried to redeem dollars, the U. S. monetary authorities could issue vast quantities of dollars with relatively little backing in gold reserves. The American government took advantage of this opportunity during the 1960s to fund increasing expenditures for the Vietnam War and domestic social programs. By 1970, the expansion of the supply of dollars had raised the prices of goods in dollar terms by 30 percent relative to 1960. In response to the declining value of the dollar, the French government threatened to provoke a crisis by demanding gold for its reserves of dollars. In response, President Nixon finally ended the convertibility of the dollar into gold in August of 1971. Since 1971, the world has had a system of fiat money, in which government-issued money is not backed by anything of tangible value. Instead, dollars are now backed by the trust that other individuals will accept them in exchange. The tape segment describes the founding of the Diner¶s Club Card in 1950, which is widely regarded as the beginning of the modern general-purpose payment card. Department stores, oil companies, and some other companies issued credit cards to their regular customers in the early tBankntieth century, but these card programs Bankre run in-house by the retailers themselves and the cards could not be used at other establishments. What was new about Diner¶s Club was that it could be used at a large number of unrelated retailers and that it was run as an independent enterprise.

some card issuers offer rewards such as airline frequent-flier miles to consumers for card use. Economics of Payment Cards Payment cards have replaced cash and checks for many transactions. To pay with a check. The terms of the loan²the grace period before interest is charged and the effective interest rate²are specified in the customer¶s agreement with the bank. (A common source of confusion occurs with debit cards that bear the MasterCard or Visa logo. and card issuers gain from the use of payment cards rather than these other transactions media? Consumers find payment cards attractive for several reasons. the customer¶s account is often debited the same day. but . When a customer uses such a card.Payment Cards The term payment card refers to a card that can be used as a medium of exchange.g. In either case. as long as the merchant follows accepted practices for detecting fraudulent use (e. he or she borrows money from the bank that issued the card and uses the proceeds to make the purchase. merchants also gain from accepting payment cards. especially those arranged over the telephone or the Internet. which often takes longer to clear and usually costs the merchant a higher fee. For some transactions. The merchant sends the transaction to Visa or MasterCard for processing. Finally. Numbers can be sent immediately over the phone or Internet. though. they would lose some customers if they did not accept payment cards. Another advantage of cards over checks is that payment is guaranteed by the issuing bank regardless of the customer¶s credit standing. and debit cards (bank ATM cards) that are in common use. but the customer usually must pay off the entire balance each month and interest is rarely charged on current balances. No credit is issued as a result of a debit card transaction. then she must enter her PIN number on a pad (a so-called point-of-sale or POS terminal) and the merchant transmits the transaction directly to her bank for processing. Diner¶s Club. Many merchants are more comfortable accepting payment cards than checks from out-of-town customers whose bank may be unfamiliar and where the costs of trying to follow up problems with the check could be very high. MasterCard. not to where the money comes from. Although they pay a fee to the company that processes their credit-card transactions. the money comes directly from the customer¶s checking account and no credit is issued. merchants. Many consumers take advantage of the credit feature of credit cards to obtain a simple loan either until the bill comes (with no interest if paid in full) or for an extended period. the merchant ends up losing money on an uncollectable check. whereas with a credit card only the account information embossed on the card needs to be transferred. the physical nature of checks makes them inconvenient. The potential risk of loss from theft is less than carrying a large amount of cash. she may be asked Debit or Credit? This refers to how the transaction is to be processed. along with the less common smart cards. Travel-and-entertainment cards work much the same way. A small plastic card is less bulky than a checkbook. getting approval from the card company and checking the signature). Debit cards are fundamentally different because the amount of the purchase is deducted directly from the customer¶s bank account. If the customer ansBankrs Debit.. and Carte Blanche). and Discover). In contrast. travel-and-entertainment cards (American Express. which is largely equivalent to writing a check. It includes the credit cards (Visa. you must physically give the check to the merchant. If she ansBankrs Credit. When a customer makes a purchase with a credit card. Most importantly. Why? What do consumers. which are discussed later on the tape. then she signs a charge slip just as in a credit-card transaction.

the Visa/MasterCard/Discover system itself. but also through annual fees and special charges for such actions as late payments and going over one¶s credit limit. Evidence suggests that the payment-card industry is highly competitive. the backbone of the payment-card system is the computerized processing capability of the card networks. Cardholders pay mainly through the interest they incur on unpaid balances. The banks and other companies involved in the system do not earn extraordinarily high profits relative to other companies in the economy. and possibly other processing companies that are employed by the merchant to manage transactions.paper must travel much more slowly. but there are two main sources of these proceeds. the bank issuing the card. . The details of how the proceeds of the transaction are distributed among these companies are complex. Of course. so payment-card transactions can proceed much more quickly than if checks are used. which include the merchant¶s bank.card transaction. Merchants pay a fee for each payment. Each of these companies must earn enough money from a payment-card transaction to cover its costs. usually proportional to the size of the transaction but often subject to a minimum fee that makes the percentage cost higher for small transactions.

some merchants raise their prices. To compensate. Another common reason of inflation is a rise in production costs. but also uplifts the poor and fixed income citizens who are the most vulnerable in society. When any extra money is created. For inflation to continue. A stable inflation not only gives a nurturing environment for economic growth. rising labour costs can also lead to inflation. Furthermore. inflation can happen when governments print an excess of money to deal with a crisis. As a result. this kind of inflation is call cost-push inflation. Low (as opposed to zero or negative) inflation may reduce the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn. Today. which in the end cause prices to rise as a way of keeping up with their debts. All sectors in the economy try to buy more than the economy can produce. these monetary authorities are the central banks that control the size of the money supply through the setting of interest rates. Shortages are then created and merchants lose business. As nations borrow money. this in turn leads to the company increasing prices to maintain their profits. The task of keeping the rate of inflation low and stable is usually given to monetary authorities. . it will increase some societal group¶s buying poBankr. Others don¶t offer discounts or sales. if raw materials increase in price. For example. the price level rises. Causes of inflation It has been generally agreed by the economists that high rates of inflation and hyperinflation are caused by an excessive growth in the supply of money. Inflation can also be caused by international lending and national debts. they have to deal with interests. and through the setting of banking reserve requirements. which leads to an increase in the price of the final product. Generally. the money supply must grow faster than the real GDP. because workers demand wage increases. In the end. as governments will have to deal with differences in the import/export level. in which prices are forced upwards because of a high demand. For example. A deep drop of the exchange rate can also result in inflation. prices end up rising at an extremely high speed to keep up with the currency surplus. depending on a number of factors. and excessive monetary growth. and companies usually chose to pass on those costs to their customers. There are many causes for inflation. most economists favour a low steady rate of inflation. through open market operations.Inflation in Pakistan Changes in the exchange rate and the prices of goods and services Inflation is the rise in the prices of goods and services in an economy over a period of time. this leads to the cost of production increasing. This is called demand-pull inflation. and reduce the risk that a liquidity trap prevents monetary policy from stabilising the economy. this sort of inflation is called wage-push inflation.

then it¶s purchasing power in the international market is lower). and can hurt individuals and companies alike. Increased risk . 7. the first type (about prices) is when there is a rise in the general level of prices of goods and services over a period of time. and therefore their income will have less value over time). 13.Higher uncertainties (uncertainties in business always exist. Hoarding (people will try to get rid of cash before it is devalued. saving money would mean watching your cash decrease in value day after day. 9. Illusions of making profits (companies will think they were making profits while in reality they¶re losing money if they don¶t take into consideration the inflation rate when calculating profits). 6. Effects of Inflation Most effects of inflation are negative. and sometimes cause a new currency to be born) 14. . Increased consumption ratio at the early stages of inflation (people will be consuming more because money is more abundant and its value is not lowered yet). but with inflation risks are very high. 8. Causes mal-investment (in inflation times. so people tend to spend the cash on something else). 4. 5. 12.A Different look Inflation is divided into two types: Price Inflation and Monetary Inflation. 3. because of the instability of prices). their income doesn¶t increase. Rising prices of imports (if the currency is debased. Distortion of relative prices (usually the prices of goods go higher. Existing creditors will be hurt (because the value of the money they will receive from their borrowers later will be lower than the money they gave before). Fixed income recipients will be hurt (because while inflation increases. especially the prices of commodities). and both have negative effects on the economy and individuals. Lowers national saving (when there is a high inflation. 10. Causes business cycles (many companies will have to go out of business because of the losses they incurred from inflation and its effects). the second type (monetary) is when there is a rise in the quantity of money in an economy. therefore causing losses in investments). Causes an increase in tax bracket (people will be taxed a higher percentage if their income increases following an inflation increase). 2. by hoarding food and other commodities creating shortages of the hoarded objects). below is a list of negative and ³positive´ effects of inflation: Negative effects are: 1. the data given about an investment is often deceptive and unreliable. Both types are in many times interrelated. 11. Income diffusion effect (which is basically an operation of income redistribution). Currency debasement (which lowers the value of a currency.

It can benefit the inflators (those responsible for the inflation) 2. Generally. Note: Banks are aware of this problem. To avoid inflation. therefore you¶re free to use your own judgment depending on circumstances. (example. let¶s suppose the inflation rate for 2005. but in reality. Tobin effect argues that: a moderate level of inflation can increase investment in an economy leading to faster growth or at least higher steady state level of income. low (as opposed to zero or negative) inflation may reduce the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn. their interest rates might rise as well. The first three effects are only positive to a few elite. such as physical capital. through open market operations. because 15% (inflation rate) ± 5% (interests) = %10 profit. 6. 2006 and 2007 has been 15%. so if you haven¶t done so. destroys small sellers. investors would switch from holding their assets as money (or a similar. So don't take out loans based on this information. you were earning %10 of interests. This is due to the fact that inflation lowers the return on monetary assets relative to real assets. you were charged %5 of interests. therefore they will be paying less money back. these monetary authorities are the central banks that control the size of the money supply through the setting of interest rates. and when inflation rises. which means you have paid only 70% of the real value in the 3 years."Positive" effects of inflation are: 1. and therefore might not be considered positive by the general public. 3. 5. The task of keeping the rate of inflation low and stable is usually given to monetary authorities. Many economists favor a low steady rate of inflation. It might relatively benefit borrowers who will have to pay the same amount of money they borrowed (+ fixed interests). here are some tips: . please read some of them above. How to Survive Inflation? Tips to avoid the negative effects of inflation are only suggestions and don¶t constitute any legal advice. to be more prepared to face inflation effects you need to be aware of those effects. susceptible to inflation. you borrowed $1000 in 2005 with a 5% fixed interest rate and you paid it back in full in 2007. but the inflation could be higher than the interests. and through the setting of banking reserve requirements. and can cause price control set by the cartels for their own benefits). form) to investing in real capital projects. It is benefit early and first recipients of the inflated money (because the negative effects of inflation are not there yet). It can benefit the cartels (it benefits big cartels. 4. and reducing the risk that a liquidity trap prevents monetary policy from stabilizing the economy.

If you have a variable-rate mortgage. do I really need these things I¶m spending my money on? Think how much and how often you will need something before buying it. have a low fixed interest rate or 0% interest if you can find one. Same goes with ephemeral items (movies.. whether in your home or in your savings account. Buy only what you need. high inflation rates completely destroy the value of longterm bonds. Invest in things that you're going to use anyway and will serve you for a long time. The conclusion from all this is: You don¶t have to live cheap. and are considered durable goods. Learn about bartering which is trading goods or services without the exchange of money (it was very popular in hyperinflation times). Be wise when holding cash.1. cable TV. it would help to reduce them or eliminate some of them. because short term investments tend to give deceptive results or sense of making profits while in reality you¶re not making profits. 8. Check out our commodities list. hotel rooms. Ask yourself. 6. 4. Invest for long-term capital gains. fix it if you can find a good deal. especially objects that have multi-tasks. Manage wisely your recurring monthly bills such as (phone bills. 10. gas) without having to reduce your consumption of goods that are rising less rapidly or even falling in price (eg. 7. 12. 2.).. restaurants. just live smart! . clothes). Use the money saving tips such as: you need to reduce your consumption of things that are rising rapidly in price (eg. 9. Be careful when buying bonds. if you¶re earning 5% interest on the money you have in your bank. and inflation rate is 10% then you¶re in reality losing 5% and not earning anything. 3. 11.. 5. Invest in durable goods or commodities rather than in money..) they¶re not bad if you spend money on them in moderation.

The NFA ensures that authorized forex dealers are subject to stringent screening upon registration and strong enforcement of regulations upon approval.Foreign Exchange. The global foreign exchange market is by far the largest financial market. For example. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock. Foreign Exchange Markets And it¶s Functions What Does Foreign Exchange Mean? It is the exchange of one currency for another or the conversion of one currency into another currency. one regulatory body responsible for authorizing forex dealers is the National Futures Association (NFA). with average daily volumes in the trillions of dollars. Foreign exchange also refers to the global market where currencies are traded virtually around-the-clock. The foreign exchange market determines the relative values of different currencies. it permits a US business to import British goods and pay Pound Sterling. and facilitates the carry trade. even though the business's income is in US dollars. by allowing businesses to convert one currency to another currency. Increasing globalization has led to a massive increase in the number of foreign exchange transactions in recent decades. or currency market) is a global. FX. it is State Bank of Pakistan Foreign Exchange Markets The foreign exchange market (forex. In Pakistan. in which investors borrow low-profit currencies and lend (invest in) high-profit currencies. The term foreign exchange is usually abbreviated as "forex" and occasionally as "FX. with the exception of weekends. and which (it has been claimed) may lead to loss of competitiveness in some countries." Foreign exchange transactions encompass everything from the conversion of currencies by a traveler at an airport kiosk to billion-dollar payments made by corporate giants and governments for goods and services purchased overseas. . It also supports speculation. worldwide decentralized over-the-counter financial market for trading currencies. Dealing with authorized forex dealers ensure that your transactions are being executed in a legal and just way. Authorized Forex Dealer Any type of financial institution that has received authorization from a relevant regulatory body to act as a dealer involved with the trading of foreign currencies.[1] The primary purpose of the foreign exchange is to assist international trade and investment. In the United States.

The risk arises because currencies may move in relation to each other.2 trillion USD worth of currency changes hands every day. and to a lesser extent the euro. Whenever investors or companies have assets or business operations across national borders. The forward exchange rate refers to an exchange rate that is quoted and traded today but for delivery and payment on a specific future date. the returns on investment may alter with exchange rate movements ² this is usually known as foreign currency exposure.g.Foreign Exchange Rate In finance. proportional to the amount of assets held in foreign currencies. SDRs and IMF reserve positions. and the various bank reserves deposited with the central bank. by the government or financial institutions. If a firm has borrowed funds in a different currency. However. the term in popular usage commonly includes foreign exchange and gold. the local currency issued. Changes in the exchange rate over time will render a report inaccurate. but it is more accurately termed official international reserves or international reserves. Foreign Exchange Reserve Foreign exchange reserves (also called Forex reserves or FX reserves) in a strict sense are only the foreign currency deposits and bonds held by central banks and monetary authorities. the UK pound. ¥) to the United States dollar (USD. about 3. If a firm is buying and selling in different currencies. These are assets of the central bank held in different reserve currencies. mostly the US dollar. if the firm has invested overseas. it exposes itself to risk. y y Transaction risk is the risk that exchange rates will change unfavorably over time. e. forex rate or FX rate) between two currencies specify how much one currency is worth in terms of the other. and so assets are usually balanced by borrowings in that currency. Any and all stock . If you invest in your home country. and your home currency devalues. and the Japanese yen. you have lost money. By some estimates. The spot exchange rate refers to the current exchange rate.[1] For example an exchange rate of 91 Japanese yen (JPY. and used to back its liabilities. $) means that JPY 91 is worth the same as USD 1. the repayments on the debt could change or. Currency Risk Currency risk is a form of risk that arises from the change in price of one currency against another. then revenue and costs can move upwards or downwards as exchange rates between currencies change. It can be hedged against using forward currency contracts. Translation risk is an accounting risk. The foreign exchange market is one of the largest markets in the world. This broader figure is more readily available. the exchange rates (also known as the foreign-exchange rate. When a firm conducts transactions in different currencies. It is the value of a foreign nation¶s currency in terms of the home nation¶s currency. Currency risk exists regardless of whether you are investing domestically or abroad. they face currency risk if their positions are not hedged.

± the costs of servicing debt becomes larger than the revenues available to do so. and UAE's $1. so-called megaprojects. Note: The above paragraph means when the countries have extra foreign currency. This is because such projects are typically financed by very large debts nominated in currencies different from the currency of the home country of the owner of the debt. A central bank that implements a fixed exchange rate policy may face a situation where supply and demand would tend to push the value of the currency lower or higher (an increase in demand for the currency would tend to push its value higher." i. unforeseen foreign currency and interest rate increases. India is also planning to create its own investment firm from its foreign exchange investments are subject to currency risk. then the cost gets greater than the revenues and thus. Singapore and Persian Gulf States would rank higher on these lists. Apart from high foreign exchange reserves. if the local currency loses its value. Excess reserves Foreign exchange reserves are important indicators of ability to repay foreign debt and for currency defense. however. and are used to determine credit ratings of nations. Currency risk has been shown to be particularly significant and particularly damaging for very large. Norway. schedule delays. these operations occur automatically. The only way to avoid currency risk is to invest in commodities. . Changes in reserves The quantity of foreign exchange reserves can change as a central bank implements monetary policy. They are able to invest in other countries and so. other government funds that are counted as liquid assets that can be applied to liabilities in times of crisis include stabilization funds. they are able to pay the loans off. Financial restructuring is typically the consequence and is common for megaprojects. otherwise known as sovereign wealth funds. which hold value independent of any monetary system. valued in excess of $145 billion and GIC valued in excess of $330 billion. with the central bank clearing any excess demand or supply by purchasing or selling the foreign currency. Mixed exchange rate regimes ('dirty floats'. Singapore also has significant government and sovereign wealth funds including Temasek Holdings. a situation where ± due to cost overruns. Mostly big projects involve loans and that too borrowed in other currencies. Note: The above paragraph means that most currency risk is seen where there is huge money involved. etc. and whether they are the same or different.3 trillion Abu Dhabi Investment Authority would be second after China. and a decrease lower). the business gets in debt trap. one-off investment projects. Now. If those were included. regardless of the nationality of the investor or the investment. target bands or similar variations) may require the use of foreign exchange operations (sterilized or unsterilized to maintain the targeted exchange rate within the prescribed limits. maintain the local currency position in the international economy. Megaprojects have been shown to be prone to end up in what has been called the "debt trap.. meaning unable to pay off your loans. In a flexible exchange rate regime.


List of countries by foreign exchange reserves The following is a list of the top 20 largest countries by foreign exchange reserves: Rank 1 2 ² 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Country Billion USD (end of month) People's Republic of China $ 3045 (Mar 2011) Japan Eurozone Russia Saudi Arabia $ 1116 (Mar 2011) $ 770 (Jan 2011) $ 504 (Mar 2011) $ 449 (Feb 2011 Republic of China (Taiwan) $ 393 (Mar 2011) Brazil India South Korea Switzerland Hong Kong Singapore Germany Thailand France Algeria Italy United States Mexico $ 322 (Apr 2011) $ 305 (Mar 2011) $ 299 (Mar 2011) $ 278 (Feb 2011) $ 273 (Mar 2011)[11] $ 233 (Mar 2011) $ 209 (Jan 2011) $ 185 (Apr 2011) $ 161 (Jan 2011) $ 155 (Dec 2010) $ 154 (Jan 2011) $ 133 (Feb 2011) $ 126 (Feb 2011) .

but as a percentage of short-term foreign debt. 5. or average monthly imports. If it expects a foreign currency to appreciate relative to its domestic currency. Fourth. and can reasonably plan to earn . or licensing agreements may all be in a foreign currency. foreign profits. 3. The adequacy of the foreign exchange reserves is more often expressed not as an absolute level. There are four major reasons firms need to convert currencies. The foreign exchange market serves two functions: converting currencies and reducing risk. a firm may want to speculate on exchange rate movements. The price at any given time is called the spot rate. 6.19 20 United Kingdom Malaysia $ 115 (Feb 2011) $ 110 (Mar 2011) These few holders account for more than 60% of total world foreign currency reserves. while it can set prices and agree to pay certain costs. it will convert its domestic funds into the foreign currency. An example similar to the one in the book can help illustrate how money can be made on exchange rate speculation. In order to use these funds in its home country. and earn profits on the changes it expects. Functions of Foreign Exchange Markets 1. Forward exchange rates allow a firm to lock in a future exchange rate for the time when it needs to convert currencies. Second. and pay these suppliers in their domestic currency. and is the rate for currency exchanges at that particular time. One can obtain the current exchange rates from a newspaper or online. First. The management focus on George Soros shows how one fund has benefited from currency speculation. 2. the payments firms receive from exports. The fact that exchange rates can change on a daily basis depending upon the relative supply and demand for different currencies increases the risks for firms entering into contracts where they must be paid or pay in a foreign currency at some time in the future. 8. 4. 7. foreign investments. Forward exchange occurs when two parties agree to exchange currency and execute a deal at some specific date in the future. Alternately stated. a firm may purchase supplies from firms in foreign countries. It can be good to point out that from a firm's perspective. it expects its domestic currency to depreciate relative to the foreign currency. an international firm has to convert funds from foreign to domestic currencies. Third. Exchange rates change on a daily basis. The book presents an example of a laptop computer purchase where using the forward market helps assure the firm that will not lose money on what it feels is a good deal. a firm may want to invest in a different country from that in which it currently holds underused funds. money supply.

These points can be illustrated with several of the currencies.a profit. when a currency is worth more in the future than it is on the spot market. 9. and is hence expected to appreciate. the firm has no recourse. When spot exchange rate changes entirely wipe out the profits on what appear to be profitable deals. . 10. it has virtually no control over the exchange rate. it is selling at forward discount. A currency swap is the simultaneous purchase and sale of a given amount of currency at two different dates and values. When a currency is worth less with the forward rate than it is with the spot rate. Likewise. it is said to be selling at a forward premium.

research. provides a forum for policy dialogue. The founders aimed to build a framework for economic cooperation that would avoid a repetition of the disastrous economic policies that had contributed to the Great Depression of the 1930s and the global conflict that followed. The global economic crisis has highlighted just how interconnected countries have become in today¶s world economy. the IMF is uniquely placed to help member governments take advantage of the opportunities²and manage the challenges²posed by globalization and economic development more generally. Key IMF activities The IMF supports its membership by providing y y y y y policy advice to governments and central banks based on analysis of economic trends and cross-country experiences. and passes on know-how to governments on how to tackle economic difficulties.Introduction to Different Financial Institutions International Monetary Fund With its near-global membership of 187 countries. and tax policies. The IMF provides policy advice and financing to members in economic difficulties and also works with developing nations to help them achieve macroeconomic stability and reduce poverty. especially in Asia. regional. statistics. Helping a country. trade. and individual economies and markets. Since then the world has changed dramatically. benefit from globalization while avoiding potential downsides is an important task for the IMF. IMF and the global financial crisis Original aims The IMF was founded more than 60 years ago toward the end of World War II. forecasts. concessional loans to help fight poverty in developing countries. including labor. In many ways the IMF's main purpose²to provide the global . globalization affects countries' policy choices in many areas. bringing extensive prosperity and lifting millions out of poverty. Marked by massive movements of capital and abrupt shifts in comparative advantage. alerts its member countries when it sees problems on the horizon. The IMF tracks global economic trends and performance. and analysis based on tracking of global. loans to help countries overcome economic difficulties. and Technical assistance and training to help countries improve the management of their economies.

More specifically. economic growth. on a temporary basis and under adequate safeguards. This capital consists of reserves built up over the years and money paid in from the bank's 187 member country shareholders. communications. infrastructure. government reforms. . IBRD lending to developing countries is primarily financed by selling AAA-rated bonds in the world's financial markets. the IMF continues to y y y y provide a forum for cooperation on international monetary problems facilitate the growth of international trade. IBRD bonds are purchased by a wide range of private and institutional investors in North America. While IBRD earns a small margin on this lending. y Who owns the World Bank? The Bank is like a cooperative in which 187 member countries are shareholders.public good of financial stability²is the same today as it was when the organization was established. health. the greater proportion of income comes from lending out our own capital. and for many other purposes. thus promoting job creation. Banks maintain strict financial discipline to maintain the AAA status of our bonds and continue to extend financing to developing countries. and Asia. a country must first join the International Monetary Fund (IMF) prior to becoming a member of the Bank. Bank help governments in developing countries reduce poverty by providing them with money and technical expertise they need for a wide range of projects² such as education. y How does a country become a member of the World Bank? Under the Articles of Agreement of the International Bank for Reconstruction and Development (IBRD). and poverty reduction. y Where does the Bank get its money? Bank raise money in several different ways to support the low-interest and no-interest loans (credits) and grants that the World Bank (IBRD and IDA) offers to developing and poor countries. and What does it do? The World Bank is a vital source of financial and technical assistance to developing countries around the world. promote exchange rate stability and an open system of international payments. IBRD income also pays for World Bank operating expenses and has contributed to IDA and debt relief. World Bank y What is the World Bank. Europe. to help them address balance of payments problems. and Lend countries foreign exchange when needed.

and knowledge. In pursuing its vision. Bank also have US$178 billion in what is known as "callable capital. grants. environmentally sustainable growth. Although most lending is in the public sector . airports. Such infrastructure helps lay the foundation for commerce and economic growth and makes essential services accessible to the poor. ADB has supported projects in agriculture and natural resources. energy. Bank has never had to call on this resource. and regional integration. development agencies. and receiving contributions from member countries. community-based organizations. advice. and foundations. ADB's main instruments comprise loans. its triple-A credit rating helps mobilize funds for development. grants. industry and nonfuel minerals. In addition to loans. the private sector. Operations For more than 40 years. Asian Development Bank ADB is an international development finance institution whose mission is to help its developing member countries reduce poverty and improve the quality of life of their people. social infrastructure. technical assistance.ADB also provides direct assistance to private enterprises of developing countries through equity investments. This is reflected in the capital backing Bank has received from shareholders in meeting their debt service obligations to IBRD. and loans." which could be drawn from our shareholders as backing. ADB's main partners are governments. . and transport and communications. of whom 48 are from the region and 19 are from other parts of the globe.Shareholder support is also very important for the Bank. recycling repayments. Headquartered in Manila.and to governments . and established in 1966. Financial Resources ADB finances its operations by issuing bonds. ADB is owned and financed by its 67 members. More than half of ADB's assistance has gone into building infrastructure . a long-term strategic framework adopted in 2008. and water and sanitation facilities. should it ever be needed to meet IBRD obligations for borrowings (bonds) or guarantees. power plants. finance. ADB will follow three complementary strategic agendas: inclusive growth. and technical assistance. Under Strategy 2020. nongovernment organizations. In addition. ADB uses guarantees and equity investments to help its developing member countries. guarantees.roads.

These 22 singledonor. 13 multi donor. governance. 37 trust funds were actively administrated by ADB.Most of ADB's lending comes from its ordinary capital resources. information and communication middle-income countries. The Asian Development Fund offers loans at very low interest rates and grants that help reduce poverty in ADB's poorest borrowing countries. HIV/AIDS. climate. ADB also provides loans and grants from Special Funds. gender and development. offered at near-market terms to lower. education. and 2 multilateral donor trust funds finance activities in various sectors or for specific themes. including poverty reduction. managing for development results. and trade and finance. As of the end of 2009. water. of which the Asian Development Fund is the largest. . energy.

An economy which relies primarily on interactions between buyers and sellers to allocate resources is known as a market economy in contrast either to a command economy or to a non-market economy such as a gift economy. a stock exchange or commodity exchange. while any two companies or people. and other fungible items of value at low transaction costs and at prices that reflect the efficient-market hypothesis. commodities (such as precious metals or agricultural goods). Financial markets can be domestic or they can be international. In finance. thus making it easier for them to find each other. typically. Trading of currencies and bonds is largely on a bilateral basis. Markets work by placing many interested buyers and sellers in one "place". Both general markets (where many commodities are traded) and specialized markets (where only one commodity is traded) exist.. and people are building electronic systems for these as well. although some bonds trade on a stock exchange. This may be a physical location (like the KSE) or an electronic system (like NASDAQ). for whatever reason. . still. spinoff) are outside an exchange. e. the term market means the aggregate of possible buyers and sellers of a certain good or service and the transactions between them. may agree to sell stock from the one to the other without using an exchange. The term "market" is sometimes used for what are more strictly exchanges. corporate actions (merger. organizations that facilitate the trade in financial securities. Much trading of stocks takes place on an exchange.g. Definition In economics. These receipts are securities which may be freely bought or sold. Typically a borrower issues a receipt to the lender promising to pay back the capital.Financial Markets In economics. a financial market is a mechanism that allows people to buy and sell (trade) financial securities (such as stocks and bonds). the lender will expect some compensation in the form of interest or dividends. similar to stock exchanges. In return for lending money to the borrower. financial markets facilitate: y y y y The raising of capital (in the capital markets) The transfer of risk (in the derivatives markets) International trade (in the currency markets) Match those who want capital to those who have it.

Secondary markets allow investors to sell securities that they hold or buy existing securities. y Money markets Which provide short term debt financing and investment. which provide financing through the issuance of bonds. Newly formed (issued) securities are bought or sold in primary markets. y Insurance markets Which facilitate the redistribution of various risks. and enable the subsequent trading thereof. y Futures markets Which provide standardized forward contracts for trading products at some future date. y Commodity markets Which facilitate the trading of commodities. y Foreign exchange markets Which facilitate the trading of foreign exchange. see also forward market. The capital markets consist of primary markets and secondary markets. o Bond markets. The transaction in primary market exist between investors and public while secondary market it¶s between investors.Types of financial markets The financial markets can be divided into different subtypes: y Capital markets which consist of: o Stock markets. . and enable the subsequent trading thereof. which provide financing through the issuance of shares or common stock. y Derivatives markets Which provide instruments for the management of financial risk.

importers and exporters now represent only 1/32 of foreign exchange dealing. This presents unique issues when attempting to analyze markets. depends on the length of the time unit to a power a bit more than 1/2. as a problem can ripple through the entire connected global network very quickly. One of the tenets of "technical analysis" is that market trends give an indication of the future. which makes proper analysis more difficult.Currency markets Seemingly. or volatility. This is the basis of the so-called technical analysis method of attempting to predict future changes. As connected as today's global financial markets are. As new opportunities appear due to integration. The scale of change. so do the possibilities of contagion. but are rather modeled better by Lévy stable distributions. enunciated a set of ideas on the subject which are now called Dow Theory. one of the founders of Dow Jones & Company and The Wall Street Journal. The scale of changes in price over some unit of time is called the volatility. It was discovered by Benoît Mandelbrot that changes in prices do not follow a Gaussian distribution. when international trade created the demand for currency markets. Charles Dow. according to the Bank for International Settlements. the most obvious buyers and sellers of currency are importers and exporters of goods. For example. a bank failure in one country can spread quickly to others. it is important to realize that there are both benefits and consequences to a global financial network. While this may have been true in the distant past. at least in the short term. A new area of concern is the proper analysis of international market effects. military bases abroad) Importers/Exporters Tourists Analysis of Financial Markets Much effort has gone into the study of financial markets and how prices vary with time. The picture of foreign currency transactions today shows: y y y y y Banks/Institutions Speculators Government spending (for example. Large changes up or down are more likely than what one would calculate using a Gaussian distribution with an estimated standard deviation. .

The most common type of efficiency referred to in financial markets is the allocative efficiency. A trait of efficient financial market is that it channels funds from the ultimate lenders to the ultimate borrowers in a way that the funds are used in the most socially useful manner. .Financial Market Efficiency In the 1970s Eugene Fama defined an efficient financial market as one in which prices always fully reflect available information. or the efficiency of allocating resources. This includes producing the right goods for the right people at the right price.

most wealthy people held accounts at their temples. moneylenders still profited. as landed noblemen were untouchable through most of history. The fact that most temples were also the financial centers of their cities is the major reason that they were ransacked during wars. Primus Bank . Additionally. but as empires expanded. . Rome. This was a monumental shift of power in the relationship of creditor and debtor. always occupied the temples. Currency. and with the Knights of the Temple during the Crusades. Flipping a Coin These coins. and these new money lenders took up the rest. gives the first example of allowing bankers to confiscate land in lieu of loan payments. Numerous people (like priests or temple workers). but most legitimate commerce and almost all governmental spending involved the use of an institutional bank. The Roman Empire eventually crumbled. Coins of varying sizes and metals served in the place of fragile. however. grew out of taxation. Because coins could be hoarded more easily than other commodities (like 300-pound pigs). Because ancient homes didn't have the benefit of a steel safe. great builders and administrators in their own right. impermanent paper bills. particularly the use of coins. in one of the edicts changing Roman law after his takeover. Small-time moneylenders that competed with the church were often denounced for usury. with interest. took banking out of the temples and formalized it within distinct buildings.The First Bank The Romans. to people in need.perhaps even before in some form or another. Julius Caesar. but some of its banking institutions lived on in the form of the papal bankers that emerged in the Holy Roman Empire. whom one hoped were both devout and honest. passing debts off to descendants until either the creditor's or debtor's lineage died out. Egypt and Ancient Babylon that suggest temples loaned money out in addition to keeping it safe. There are records from Greece. there emerged a class of wealthy merchants that took to lending these coins.Evolution of Banking System Divine Deposits Banks have been around since the first currencies were minted . empires began to need a way to pay for foreign goods and services with something that could be exchanged more easily. needed to be kept in a safe place. During this time. adding a sense of security. Temples generally handled large loans as well as loans to various sovereigns. In the early days of ancient empire. as loan sharks do today. a tax of on healthy pig per year might be reasonable. this type of payment became less desirable.

in rapid succession. A bank robbery meant a lot more before than it does now in the age of deposit insurance (and the Federal Deposit Insurance Corporation . costly wars and an arms race with neighboring kingdoms that lead to crushing debt. after which most bank notes from the defaulted banks became worthless. the royal powers began to take loans to make up for hard times at the royal treasury . Phillip II of Spain managed to burden his kingdom with so much debt as the result of several pointless wars that he caused the world's first national bankruptcy . the national banks pushed out the competition. In 1557. cancellations and resurrections. moneylenders and bankers managed to limit the state's involvement in the banking sector and the economy as a whole. Adam Smith and Modern Banking Banking was already well established in the British Empire when Adam Smith came along in 1776 with his "invisible hand" theory. created a uniform national currency and set up a system by which national banks backed their notes by purchasing Treasury securities . This free market capitalism and competitive banking found fertile ground in the New World where the United States of America was getting ready to emerge. after a few stops. . The trend of turning a blind eye to the creditworthiness of big customers continues to haunt banks up into this day and age. This easy finance led kings into unnecessary extravagances. Compounding these risks was the cyclical cash crunch in America. This national bank. as average Americans had already grown to distrust banks and bankers in general. established a national bank that would accept member bank notes at par. starts. Through the imposition of taxes on the relatively lawless state banks. the various monarchs that reigned over Europe noted the strengths of banking institutions.FDIC). These state-chartered banks could. only issue bank notes against gold and silver coins they had in reserve. Empowered by his views of a self-regulated economy. As banks existed by the grace. Smith's ideas did not benefit the American banking industry. thus floating banks through difficult times. Alexander Hamilton. and occasionally explicit charters and contracts.often on the king's terms. third and well as the second. This occurred because 40% of the country's gross national product (GNP) was going toward servicing the debt.a law that stood until 1904. The average life for an American bank was five years. the secretary of the Treasury. In the beginning. however.Visa Royal Eventually. after all. The damage had been done already. This feeling would lead the state of Texas to actually outlaw bankers .thus creating a liquid market. of the ruling sovereign.

As large industry emerged and created the need for corporate finance. so IPOs and bond offerings to the public became the only way to raise the needed capital.S. if the management proved lacking. as well as duopolies and near-monopolies in the railroad and shipping industries through the revolutionary use of trusts and a disdain for the Sherman Anti-Trust Act. These banks left consumer loans to the lesser banks that were still failing at an alarming rate. This mysterious practice meant that a bank's reputation and history mattered more than anything. and. Racism was also widespread and. their customers were split along clear class and race lines.P. the amounts of capital required could not be provided by any one bank. they ran the companies themselves. even though the Jewish and Anglo-American bankers had to work together on large issues. above-average loan losses. Morgan and Co. By the late 1800s. many banks demanded a position on the boards of the companies seeking capital. fell into the hands of large merchant banks.Merchant Banks Because the national banking system was so sporadic. most of the economic duties that would have been handled by it. a bank was under no legal obligation to disclose its capital reserve amounts . and had considerable political clout in the United States. Morgan and Company emerged at the head of the merchant banks during the late 1800s. At that time. Consequently. in addition to regular banking business like loans and corporate finance.S. While upstart banks came and went. Kuhn. Although the dawn of the 1900s had well-established merchant banks.P. these merchant banks parlayed their international connections into both political and financial power. AT&T and International Harvester. created indication of its ability to survive large. successful offerings increased a bank's reputation and put it in a position to ask for more to underwrite an offer. Morgan and Monopoly J. Loeb. then the financial center of the world. they relied heavily on commissions from foreign bond sales from Europe with a small backflow of American bonds trading in Europe. and the foreign investors in Europe knew very little about investing (due to the fact that disclosure was not legally enforced) these issues were largely ignored according to the public's perception of the underwriting banks. Steel. Because the public in the U. it was difficult for the average American to get loans from them. These banks didn't advertise and they rarely extended credit to the "common" people. Originally. Morgan and Company. these family-held merchant banks had long histories of successful transactions. . This allowed them to build up their capital. It was connected directly to London. During this period of unrest that lasted until the 1920s. These banks included Goldman and Sachs. and J.

Such loans and advances are given to members of the public and to the business community at a higher rate of interest than allowed by banks on various deposit accounts. b) Grant of loans and advances The second important function of a commercial bank is to grant loans and advances. Thus. i) Primary functions: The primary functions of a commercial bank include: a) Accepting deposits. Loans are generally granted against the security of certain assets. a) Accepting deposits The most important activity of a commercial bank is to mobilize deposits from the public. The rate of interest charged on loans and advances varies depending upon the purpose. However. The borrower may withdraw the entire amount in lump sum or in installments. commercial banks grant short-term loans. may also be granted. period and the mode of repayment. ii) Advances An advance is a credit facility provided by the bank to its customers. deposits with the bank grow along with the interest earned. interest is charged on the full amount of loan. It differs from loan in the sense that loans may be granted for longer period. public are motivated to deposit more funds with the bank.Functions of Commercial Banks The functions of commercial banks are divided into two categories: i) Primary functions. Further the purpose of granting advances is to meet the day to day requirements . and ii) Secondary functions including agency functions. People who have surplus income and savings find it convenient to deposit the amounts with banks. A loan may be repaid either in lump sum or in installments. loan for more than a year. that is. The difference between the rates of interest allowed on deposits and the rate charged on the Loans is the main source of a bank¶s income. Generally. There is also safety of funds deposited with the bank. But term loans. funds deposited with bank also earn interest. Depending upon the nature of deposits. but advances are normally granted for a short period of time. If the rate of interest is higher. i) Loans A loan is granted for a specific time period. and b) Granting loans and advances.

d) Transferring money from one place to another. banks perform a number of other functions which are called secondary functions. In case any bill is dishonoured on the due date. e) Standing guarantee on behalf of its customers. that is. These are as follows a) Issuing letters of credit. It is a temporary arrangement. circular notes etc. making payment of the amount before the due date of the bills after deducting a certain rate of discount. overdraft and bill discounting. machinery. vehicles etc. A customer who has a current account with the bank is allowed to withdraw more than the amount of credit balance in his account. Interest is charged on the amount actually withdrawn. and from one branch to another branch of the bank. Cash Credit is granted as per agreed terms and conditions with the customers. b) Undertaking safe custody of valuables. Overdraft facility with a specified limit is allowed either on the security of assets. or both. b) Overdraft Overdraft is also a credit facility granted by bank. or on personal security. important documents. c) Discounting of Bills Banks provide short-term finance by discounting bills. for making payments for purchase of goods. Interest is charged only on the amount withdrawn and not on the sanctioned amount. The rate of interest charged on advances varies from bank to bank. the bank can recover the amount from the customer. The customer can withdraw this amount as and when he requires. ii) Secondary functions Besides the primary functions of accepting deposits and lending money. .of business. The party gets the funds without waiting for the date of maturity of the bills. and securities by providing safe deposit vaults or lockers. The amount is credited to the account of the customer. travellers cheques. Modes of short-term financial assistance Banks grant short-term financial assistance by way of cash credit. a) Cash Credit Cash credit is an arrangement whereby the bank allows the borrower to draw amounts upto a specified limit. c) Providing customers with facilities of foreign exchange.

rces of income of the banks. g) Issuing demand drafts and pay orders. 3. These are the secondary of the bank. Current accounts do not carry any interest as the amount deposited in these accounts is repayable on demand without any restriction. Banks usually charge a small amount known as incidental charges on current deposit accounts depending on the number of transaction. These are the main activities 1. . The following types of deposits are usually received by banks: i) Current deposit ii) Saving deposit iii) Fixed deposit iv) Recurring deposit v) Miscellaneous deposits i) Current Deposit Also called µdemand deposit¶. and. current deposit can be withdrawn by the depositor at any time by cheques. 2. Difference between Primary and Secondary Functions of Commercial Banks Primary Functions Secondary Functions 1. Businessmen generally open current accounts with banks. h) Providing reports on the credit worthiness of customers. These are the main sources These are not the main souof income of the bank. the part of bank to perform. Different modes of Acceptance of Deposits Banks receive money from the public by way of deposits. These are obligatory on the These are not obligatory on part of bank to perform. But generally all commercial banks perform these activities.f) Collecting and supplying business information. The Reserve bank of India prohibits payment of interest on current accounts or on deposits up to 14 Days or less except where prior sanction has been obtained. activities of the bank.

the bank may invest these funds more profitably by lending at higher rates of interest and for relatively longer periods.or more per month and the period of account may vary from 12 months to 10 years. Each installment may vary from Rs. which is to be determined at the time of opening of the account. Children Gift plan. The loans are particularly granted to businessmen and members of the public against personal security.Savings deposit/Savings Bank Accounts Savings deposit account is meant for individuals who wish to deposit small amounts out of their current income.500/. Recurring Deposits Recurring Deposits are gaining wide popularity these days. it is necessary for the depositor to be introduced by a person having a current or savings account with the same bank.5/. The rate of interest on fixed deposits depends upon the period of deposits. Mini deposit scheme. Savings account holders are also allowed to deposit cheques. A saving account can be opened with or without cheque book facility. Fixed deposits are most useful for a commercial bank. The rate of interest to be allowed on fixed deposits is governed by rules laid down by the Reserve Bank of India. After the completion of the specified period. gold and silver and other movable and immovable assets. drafts. Since it is repayable only after a fixed period of time. To open a savings account. the depositor is required to deposit a fixed amount of money every month for a specific period of time. It helps in safe guarding their future and also earning interest on the savings. etc. like Home Construction deposit scheme. the customer gets back all his deposits along with the cumulative interest accrued on the deposits. The longer the period. Sickness Benefit deposit scheme. Commercial bank generally lend money in the following form: i) Cash credit ii) Loans . dividend warrants. Old age pension scheme. Under this type of deposit. Fixed deposit The term µFixed deposit¶ means deposit repayable after the expiry of a specified period. Since they are repayable only after a fixed period. Different methods of Granting Loans by Bank The basic function of a commercial bank is to make loans and advances out of the money which is received from the public by way of deposits. the higher is the rate of interest offered. Miscellaneous Deposits Banks have introduced several deposit schemes to attract deposits from different types of Rs. drawn in their favor for collection by the bank. There are restrictions on the withdrawals from this account. etc. it is also known as time deposit.

In other words it is repayable at short notice. Loans are normally granted by the bank against tangible securities including securities like N.S. The repayment is generally made in suitable installments of fixed amount. modernization. The borrower can repay the loan either in lumpsum (one time) or as agreed with the bank. ii) Loans: A specified amount sanctioned by a bank to the customer is called a µloan¶. or b) Term loan a) Demand loan Demand loan is repayable on demand. This a very popular method of lending in our country. expansion/extension of existing units. construction of factory building or purchase of other immovable assets. Life Insurance policies and U. It is granted for a fixed period.. The specified amount is put on the credit of the borrower¶s account. purchase of plant and machinery. He can withdraw this amount in lump sum or can draw cheques against this sum for any amount. or a year. A loan is generally granted against the security of property or personal security. renovation. These loans are generally secured against the mortgage of land. These loans are repayable over a period of 5 years and maximum up to 15 years. Term loans are granted for more than one year and repayment of such loans is spread over a longer period. The borrower draws the money as and when he needs. certificates. The loan can be granted as: a) Demand loan. b) Term loans Medium and long term loans are called µTerm loans¶. and iv) Discounting of Bills i) Cash Credit: A cash credit is an arrangement whereby the bank agrees to lend money to the borrower upto a certain limit.C.T. plant . Hence a bank is at liberty to grant loan depending on its own resources. The bank puts this amount of money to the credit of the borrower. The entire amount of demand loan is disbursed at one time and the borrower has to pay interest on it. vehicles. The loan may be repaid in lump sum or in installments. Interest is charged on the full amount even if the borrower does not utilise it. Interest is charged only on the amount actually drawn and not on the amount placed to the credit of borrower¶s account. Term loan is required for the purpose of setting up of new business activity. The rate of interest is lower on loans in comparison to cash credit. land for setting up a factory. Kisan Vikas Patra. Every bank has its own procedure of granting loans.iii) Bank overdraft. say six months.I. Cash credit is generally granted on a bond of credit or certain other securities.

Sometimes. Such bills of exchange arise out of commercial transactions both in internal trade and external trade. Bills of exchange are negotiable instruments and enable the debtors to discharge their obligations towards their creditors. building and other securities.and machinery. A contractual agreement in which a borrower receives something of value now and agrees to repay the lender at some date in the future. It is a short term facility. the banks help the business community. a debit will reduce net income. loans and overdraft. The normal rate of interest charged for such loans is generally quite high. On the company's income statement. The customer is permitted to withdraw the amount as and when he/she needs it and to repay it through deposits in his account as and when it is convenient to him/her. The interest rate on overdraft is higher than that of the rate on loan. An accounting entry that either decreases assets or increases liabilities and equity on the company's balance sheet. banks also grant financial assistance to customers by discounting bills of exchange. Banks purchase the bills at face value minus interest at current rate of interest for the period of the bill. The amount of money available to be borrowed by an individual or a company is referred to as credit because it must be paid back to the lender at some point in the future. iv) Discounting of Bills Apart from granting cash credit. For example. Overdraft facility is the result of an agreement with the bank by which a current account holder is allowed to withdraw a specified amount over and above the credit balance in his/her account. This is known as µdiscounting of bills¶. when you make a purchase at your local mall with your VISA card it is considered a form of credit because you are buying goods with the understanding that you'll need to pay for them later. Credit What Does Credit Mean? 1. Of course. This facility is made available to current account holders who operate their account through cheques. the banks recover the full amount of these bills from the persons liable to make payment. Interest is charged on actual amount withdrawn by the customer. Overdraft facility is generally granted by bank on the basis of a written request by the customer. banks also insist on either a promissory note from the borrower or personal security to ensure safety of funds. . The term also refers to the borrowing capacity of an individual or company. By discounting these bills before they are due for a nominal amount. iii) Bank Overdraft Overdraft facility is more or less similar to cash credit facility. generally with interest. 2. while a credit will increase net income.

4-Economy in the use of Metal: Credit instruments are used in place of metallic coins. so he avails the credit facility. The importance of credit can be judged by the following facts. So they lend it to the financial institutions. 5-Provision of Working Capital: Sometimes an industrialist faces the finance problem to purchase the raw material or for the payment of wages. Our production sources are limited. . No production is on large scale and cost per unit has been reduced. If the firm prospects are bright it will repay the principal amount with interest. 3-Shifting of Capital to Productive Lands: There are so many people who have surplus money but they are not capable to do any business. So they lend it to the financial institutions. The credit instruments only represent money and facilitate the business. The quality and quantity has been improved. 6-Sales of Bonds: Sometimes a firm can obtain credit by selling the bonds.Functions of Credit Credit is neither capital nor it creates capital. Credit makes possible the shifting of money to those people who can use it for productivity. 1-Large Scale Production: The fewer developing countries like Pakistan are facing capital storage problem. Future use of Credit instruments is more effective and convenient. 2-Increase in Saving Rate: Credit provides an opportunity to save the money. So there is a saving of precious metals. some people save the money but they are not capable to do any business. So credit instruments have provided the money to the industrialists.

. If the person has all the qualities of a good entrepreneur but having no capital.7-Case of Young Firm: Credit enables the manager of a young firm to develop its resources at a rapid speed. 8-Emergency of New Businessman: Credit makes possible the entrance of new talent in the business enterprise. Credit provides him the chance to utilize his qualities.

they have to pay for transport services. Export of surplus production: External trade facilitates export of surplus production of a country and import necessary items. Export involves sale of goods and services to other countries. Sale of services would be regarded as invisible exports.External Trade External trade refers to buying and selling of goods and services between nationals of different countries. Hence. Specialization based on resources endowment: The quantity and quality of resources available in countries differ on account of climate and geographical formation. . and railway services are also required in external trade. Advantages of external trade are enumerated below: Availability of a large variety of goods: External trade enables a country to avail of the use of a variety of goods which cannot be produced in the home country or can only be produced at a higher cost. Specialization leads to increase in productivity and superior quality of goods. insurance. it is known as entrepot trade. When goods are imported into a country with the purpose of re-exporting them to some other country. Likewise. External trade consists of export trade and import trade. Higher standard of living: It improves the standard of living of people in different countries. banking and finance. other services such as warehousing. Thus. services used may be called invisible imports by India. When goods are traded by way of imports and exports the transactions are regarded as visible trade. In this way. Exchange of goods and consumption thereof leads to a higher standard of living of the people in the world. if Indian exporters avail of British shipping services for transportation of goods. External trade in service is referred to as invisible trade. This results in development of large scale industries. Import consists of purchases from other countries. a country can get the benefit of using goods which it is not able to produce due to certain natural. physical or other limitations. for example. Price equalization: External trade leads to equalization of prices of commodities in the world markets after making allowance for transport and other costs. It brings stability and uniformity in the prices of commodities in all the countries of the world. by importing them from other countries. External trade enables each\ country to specialize in the production of those commodities for which it enjoys relative advantage. or trade between agencies of the governments of different countries.

International relations: External trade develops business relations among different countries of the world which facilitate exchange of ideas and enrichment of culture. The seller of such goods and services is referred to as an "exporter" who is based in the country of export whereas the overseas based buyer is referred to as an "importer". famine. leather goods of Africa. batik art of Indonesia and brassware of India are known all over the world. Thus. like fruits. adversely affect the productive capacity of a country. "exports" refers to selling goods and services produced in home country to other markets. Export goods or services are provided to foreign consumers by domestic producers. transported from one country to another country in a legitimate fashion. etc. meat. typically for use in trade. wood. drought etc. Export of commercial quantities of goods normally requires involvement of the customs authorities in both the country of export and the country of import. The advent of small trades. has largely bypassed the involvement of Customs in many countries because of the low individual values of these trades. external trade promotes cordial relations and understanding among nations of the world. External trade ensures adequate supply of those commodities which are in short supply within the country due to such natural calamities. There is always a demand for these goods specially in developed countries. Development of trade promoting services: Foreign trade has led to development of modern means of communication and efficiency in banking and insurance services. flowers. For instance. Any good or commodity. coal. these small exports are still subject to legal restrictions applied by the country of export. An export's counterpart is an import. vegetables. These services have enabled countries to have trade even in voluminous goods like food grains. Nonetheless. medicine and food can be imported from other countries during an emergency. and perishable goods. the carpets of middle east countries.Security from natural calamities: Natural calamities such as flood.. Exports The term export is derived from the conceptual meaning as to ship the goods and services out of the port of a country. In International Trade. over the internet such as through Amazon and e-Bay. . For example.

Imports. . and outsourcing are all having a major impact on the international trade system. Then trade in goods and services can serve as a substitute for trade in factors of production. multinational corporations. The reason is that a border typically imposes additional costs such as tariffs. "Imports" also means the economic value of all goods and services that are imported. the legal system or culture. a country can import goods that make intensive use of the factor of production and are thus embodying the respective factor. a commodity) or service brought in from one country to another country in a legitimate fashion. form the basis of international trade. Increasing international trade is crucial to the continuance of globalization. social. and only to a lesser extent to trade in capital. International trade is in principle not different from domestic trade as the motivation and the behavior of parties involved in a trade do not change fundamentally regardless of whether trade is across a border or not. it represents a significant share of gross domestic product (GDP). Without international trade. The main difference is that international trade is typically more costly than domestic trade. tariffs and trade agreements. In most countries. An example is the import of labor-intensive goods by the United States from China. Industrialization. International trade International trade is exchange of capital. typically for use in trade. An import in the receiving country is an export to the sending country. and political importance has been on the rise in recent centuries. Import goods or services are provided to domestic consumers by foreign producers. Thus an import is any good (e. its economic. Amber Road). It is a good that is brought in from another country for sale.Imports The term import is derived from the conceptual meaning as to bring in the goods and services into the port of a country. along with exports. labor or other factors of production. Another difference between domestic and international trade is that factors of production such as capital and labor are typically more mobile within a country than across countries. globalization.g. advanced transportation. When the "imports" are the set of goods and services imported. time costs due to border delays and costs associated with country differences such as language. Thus international trade is mostly restricted to trade in goods and services. Instead of importing a factor of production. goods. While international trade has been present throughout much of history (see Silk Road. The buyer of such goods and services is referred to an "importer" who is based in the country of import whereas the overseas based seller is referred to as an "exporter". Import of goods normally requires involvement of the customs authorities in both the country of import and the country of export and are often subject to import quotas. Instead of importing Chinese labor the United States is importing goods from China that were produced with Chinese labor. and services across international borders or territories. nations would be limited to the goods and services produced within their own borders.

or to protect duplicity natural resources. safety. have the effect of tariffs once they are enacted. or sanitation. they are criticized as a means to evade free trade rules. . Some non-tariff trade barriers are expressly permitted in very limited circumstances. Their use has risen sharply after the WTO rules led to a very significant reduction in tariff use. together with international finance. meaning 'fees to be paid. although they are called "non-tariff" barriers.International trade is also a branch of economics. The barriers can take many forms. Trade Problem Trade barriers are a general term that describes any government policy or regulation that restricts international trade. including the following terms that include many restrictions in international trade within multiple countries that import and export any items of trade: y y y y y y Tariffs Non-tariff barriers to trade Import licenses Import quotas Subsidies Embargo Tariff A tariff is a tax levied on imports or exports. The word is derived from the Arabic word ta r f. when they are deemed necessary to protect health. which. Non-tariff barriers to trade Non-tariff barriers to trade (NTBs) are trade barriers that restrict imports but are not in the usual form of a tariff. forms the larger branch of international economics. which. In other forms. Some common examples of NTB's are anti-dumping measures and countervailing duties.

and marking 4. Customs and Administrative Entry Procedures: 1.Six Types of Non-Tariff Barriers to Trade 1. Intergovernmental acceptances of testing methods and standards 3. Charges on imports: 1. Embargoes 2. Export subsidies 3. Valuation systems 2. Antidumping practices 3. Import credit discriminations 5. Standards: 1. Variable levies 6. Prior import deposit subsidies 2. Packaging. Import Licensing requirements 3. Government procurement policies 2. Border taxes . Proportion restrictions of foreign to domestic goods (local content requirements) 4. Specific Limitations on Trade: 1. Countervailing duties 4. Domestic assistance programs 5. Government Participation in Trade: 1. labeling. Minimum import price limits 5. Quotas 2. Documentation requirements 5. Administrative fees 3. Fees 3. Special supplementary duties 4. Tariff classifications 4. Standard disparities 2.

Voluntary export restraints 2. and the total volume allowed should not exceed the quota. Each license specifies the volume of imports allowed.For Example. it is argued that this allocation method provides incentives for political lobbying and bribery. Examples are subsidies to encourage the sale of exports. . as a result of continuous unprofitable operations) or an increase in the prices of its products or simply to encourage it to hire more labor (as in the case of a wage subsidy). if a business wishes to import agricultural products such as vegetables. subsidies on some foods to keep down the cost of living. Critics say quotas often lead to corruption (bribes to get a quota allocation). In economics. Import licenses are considered to be non-tariff barriers to trade when used as a way to discriminate against another country's goods in order to protect a domestic industry from foreign competition. or simply a fee. quotas are thought to be less economically efficient than tariffs which in turn are less economically efficient than free trade. Licenses can be sold to importing companies at a competitive price. smuggling (circumventing a quota). However.6.g. Orderly marketing agreements Import license An import license is a document issued by a national government authorizing the importation of certain goods into its territory. then the government may be concerned about the impact of such importations of the local market and thus import a restriction.. and higher prices for consumers. Others: 1. like other trade restrictions. Government may put certain restrictions on what is imported as well as the amount of imported goods and services. Quotas. Most subsidies are made by the government to producers or distributors in an industry to prevent the decline of that industry (e. are used to benefit the producers of a good in a domestic economy at the expense of all consumers of the good in that economy. and subsidies to encourage the expansion of farm production and achieve self-reliance in food production. Subsidy A subsidy (also known as a subvention) is a form of financial assistance paid to a business or economic sector. Import quota An import quota is a type of protectionist trade restriction that sets a physical limit on the quantity of a good that can be imported into a country in a given period of time. especially in urban areas.

. y Revocable versus Irrevocable  You should always insist and carefully check that a letter of credit is irrevocable. guaranteeing. the bank will be required to cover the full or remaining amount of the purchase. in order to isolate it. If two or more nations repeatedly use trade barriers against each other. which are often considered to be acts of war. then a trade war results. Embargoes are similar to economic sanctions and are generally considered legal barriers to trade. Embargoes are considered strong diplomatic measures imposed in an effort. The differences are found in the wording.Embargo An embargo is the partial or complete prohibition of commerce and trade with a particular country. Most trade barriers work on the same principle: the imposition of some sort of cost on trade that raises the price of the traded products. that a buyer's payment to a seller will be received on time and for the correct amount. Letter of Credit A letter from a bank. to elicit a given national-interest result from the country on which it is imposed. by the imposing country. Types of LC There are several types of letters of credit. not to be confused with blockades. In the event that the buyer is unable to make payment on the purchase.

 Advised does not guarantee the creditworthiness of the Opening Bank.  Usance time can be between 30 and 180 days after the bill of lading date. as the Confirming Bank promises to pay. Once an irrevocable letter of credit is open it cannot be changed without the written consent of all parties including the beneficiary. . y Confirmed versus Advised  Confirmed is preferred. y A revocable letter of credit can be change or withdrawn without notifying the beneficiary.  A straight letter of credit can only be paid in the country of the Paying Bank. and should be avoided. y This is a form of delayed payment. y Straight versus Negotiation  A negotiation letter of credit can be presented to any bank. y Sight versus Usance  At sight means the Beneficiary is paid as soon as the Paying Bank has determined that all necessary documents are in order.

State 00000] ACCOUNT PARTY: [LOC Issuing Party¶s Name] [Street] [City. SW Washington.C. [0000000] BENEFICIARIES: United States Department of Agriculture Rural Utilities Service 1400 Independence Ave. (hereinafter the ³BORROWER´) for the sum or sums not to exceed the aggregate amount of [AMOUNT IN WORDS] Dollars ($000. .´) to be made available by either of your requests for payment at sight.. State 00000] Gentlemen: We.] (the ³BANK´) hereby open our irrevocable standby credit (this ³Letter of Credit´) on behalf of [BORROWER¶S NAME] (hereinafter the ³ACCOUNT PARTY´) in favor of the RURAL UTILITIES SERVICE (³RUS´) and [BORROWER¶S NAME]. D. 20250-1500 [Borrower¶s Name] [Street] [City. [NAME OF BANK.SAMPLE LETTER OF CREDIT [Bank Name] [Street] [City. State 00000] [Date] IRREVOCABLE STANDBY LETTER OF CREDIT NO.000) (hereinafter the ³Maximum Amount.

and accompanied by the documents required by this Letter of Credit. This Letter of Credit sets forth in full the terms of our understanding with you. The BANK hereby agrees to honor one or more drafts drawn under. and (c) [LOC ISSUING PARTY¶S NAME] at [Street. and this undertaking shall not in any way be modified.D. (b) the BORROWER at [Street. Such draft(s) shall be presented to our office at [Street.The BANK has been informed by the ACCOUNT PARTY that this Letter of Credit is issued to secure obligations as set forth in that certain loan agreement. Funds under this Letter of Credit are available to RUS and/or the BORROWER in one or more drawings upon the presentation of one or more executed drafts payable at sight. Very Truly Yours. or to which it relates. and Washington. and the BANK¶s honoring of such draft or demand shall not relieve its obligation to so honor any further drafts or demands. this Letter of Credit may not be secured. 1400 Independence Ave. entered into between the BORROWER and RUS. D. . that our aggregate obligation to honor such drafts and demands shall not exceed the Maximum Amount as reduced by prior draws hereunder. and in conformity with this Letter of Credit. and International Chamber of Commerce Publication No. dated as of [date] (as amended from time to time. State.C.A. This Letter of Credit shall be valid until [insert date five years from today]. or demands for payment made under. instrument. 500.´) The BANK also acknowledges that pursuant to said Loan Agreement. After receiving RUS consent.W. Zip]. in the form as provided in Exhibits 1 or 2 attached hereto. Zip] . provided however. and is the obligation of the BANK which is in no way contingent upon reimbursement or likelihood of reimbursement. on any business day except those in which banking institutions in our State are authorized or required by law to close. State. Room 2854. if any). hereinafter the ³Loan Agreement. amplified. or in which this Letter of Credit is referred to. This Letter of Credit is not subject to any condition or qualification. up to the Maximum Amount. S. City. as well as drafts presented by one or both beneficiaries.S. as well as the original of this Letter of Credit (including all amendments thereto. City. 20250-1599. Partial drawings and multiple drawings are permitted under this Letter of Credit. 1993 Revision. provided however... Stop 1599.. except only the drafts referred to herein This letter of credit is issued subject to the Uniform Customs and Practices for Documentary Credits. City. guaranteed. The notice required hereunder will be deemed to have been given when received by all parties. State Zip]. or limited by reference to any document. amended. the BANK shall provide written notice of termination by certified mail to: (a) RUS at U. that this Letter of Credit may be terminated at any time with the prior written consent of RUS. or agreement referred to herein. or serviced by any asset of the BORROWER.

[NAME OF BANK] by:________________________ Name: Title: .

as originally lay down in the State Bank of Pakistan Order 1948.State Bank The State Bank of Pakistan (SBP) is the central bank of Pakistan. The primary function of a central bank is to provide the nation's money supply. While its constitution. with subsequent amendments. when the bank was nationalized. Central banks often also oversee the commercial banking system of their respective counties. but more active duties include controlling. the scope of its functions was considerably enlarged. and controls the interest rates in a country. which usually serves as the nation's legal tender. Central Bank of Pakistan . interest rate and acting as a lender of last resort to the banking sector during times of financial crisis. Karachi with its second headquarters in the capital. In contrast to a commercial bank. reserve bank. 1974. forms the basis of its operations today. It may also have supervisory powers. or monetary authority is a public institution that usually issues the currency. regulates the money supply. The State Bank of Pakistan Act 1956.Central Banking A central bank. The headquarters are located in the financial capital of Pakistan. to ensure that banks and other financial institutions do not behave recklessly or fraudulently. Islamabad. Departments Working in State Bank y y y y y y y y y y y y y y y y y y y y y y y Agriculture credit Audit Banking Inspection Banking Policy & Regulations Banking Supervision Corporate Services Economic Analysis Financial Monitoring Unit Monetary Policy Research Statistics and Data Warehouse Exchange Policy Human Resource Information Systems & Technology Islamic Banking Legal Services Library Payment System Real Time Gross Settlement System (RTGS System) Small and Medium Enterprises Training and Development Department (TDD) Treasury Operations Strategic & Corporate Planning . remained basically unchanged until January 1. a central bank possesses a monopoly on printing the national currency.

y y Microfinance Pakistan Remittance Initiative Functions of State Bank include: y y y y y y y implementing monetary policy determining Interest rates controlling the nation's entire money supply the Government's banker and the bankers' bank ("lender of last resort") managing the country's foreign exchange and gold reserves and the Government's stock register regulating and supervising the banking industry setting the official interest rate ± used to manage both inflation and the country's exchange rate ± and ensuring that this rate takes effect via a variety of policy mechanisms .

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