Finanzas Internacionales

salvador.cruz@udlap.mx

The Gloabl Financial System

What is money?

Economists define money not only as coins and bills, but also with M1, M2, M3 and M4.

M1: Bills, currency, on sight deposits.

M2: M1 + 48 hours deposits.

M3: M2 + illiquid assets redeemable before a year.

M4: M3 + assets with more than a year liquidity

Money's functions: medium of exchange, account unit, reserve of value.

*reserve of value: an asset.

Medium of exchange

Before money, people bartered goods and services, which difficulted the process of transaction.
Money facilitated this process.

Liquidity of money means that the same money will eventuually be used many times for different
transactions.

Accounting Unit

For taxes.

Reserve of value

It is a means of saving.

Inflation undermines the value of money over time, and also distorts the price system. Everything
will be more expensive tomorrow.

Money's Evolution

The gold standard

In 1913, the US President signed the federal reserve act, which established that the central back
was decentralized. The purpose was to become the lender of last resort and solve the inelasticity
of money. The obligations were to maximize employment and stabilize prices.

The First World War

After the First World War, food production dropped in the countries that participated in the war;
the Treaties of Versailles meant to repair the damages. However, multiple factors turned what was
meant for good to a world-wide catastrophe as the Treaty of Versailles failed to resolve issues
among countries.

Great Depression happened.

The gold standard was a system in which countries set an amount of gold for their currency with
no restriction to import and export gold and gold coins were circulaiting freely.

The problem was that there was an international imbalance because and many countries had
minimum reserve ratios and countries inflated their gold ratios. Some countries were buying a lot
of stock but were not able to pay in gold. Additionally, each country had the right to decide on the
composition of the coins used.

Countries raised their interest rates to stop hyperinflation and this created imbalances in the
capital account. Eventually, European countries decided to abandon the gold standard, with the
first country being Great Britain. However, the United States stuck to the gold standard until 1933,
which worsen the hit of the Great Depression.

The Bretton Woods accords

The Bretton Woods accords were created to establish an efficient exchange system to solve the
problem of imbalances caused by the gold standard. The accords dictated that only the dollar was
linked to gold, moreover, the rest of the world currencies would be pegged to the value of the
dollar afterwards.

This resulted in the creation of the World Trade Organization, the World Bank and the
International Monetary Fund, the last two being included in the Bretton Woods Agreement.

The International Monetary Fund was created to monitor the exchange rates and identify any
nation in monetary trouble. Additionally, the World Bank was created to manage funds and give
loans to provide assitance to countries affected by the World War II.

In 1971, the US gold supplu was not adequate to cover the number of dollar that were circulating,
so the dollar was devaluated relative to gold and the convertibility of the currency into gold was
suspended.
By 1973, the Bretton Woods accords' system collapsed and countries were free to adopt any
exchange rate agreement.

After the creation of the GATT, the international trade barriers were lowered, increasing the
international company's profits. The Gatt contains a "most favoured nation" clause which
establishes a prohibition for members to offer better rates to countries that don't belong to the
GATT.

One of the main flaws of the Bretton Woods agreements was that the central banks of the
member countries had to have dollar reserves backed by gold; countries could not expand their
money supply beyond their dollar reserves since they created imbalances in their capital balances.

Triffin dilemma:

The country whose currency is usually the global reserve currency, must be willing to offer the
world a more significant amount of its currency to cover demand, leading to a trade deficit.

To maintain liquidity, the International Monetary Fund created "Special Drawing Rights" in 1969,
which contained coins from 16 countries that represented more than 1% of world trade. These are
a basket of the five most accepted currencies in the world: USA dollar, euro, chinese yuan,
japanese yen and british pound.

At the end, president Nixon ordered the cessation of the convertibility of the dollar to gold in
1971.

Louvre Agreements

1. Fiscal discipline: High deficits led to macroeconomic imbalances that caused inflation in Latin
America.

2. Prioritize public spending: Redistribute spending, reducing unjustified subsidies for health,
education and infrastructure.

3. Tax reform: Expand the tax base and with moderate marginal rates.

4. Liberalization of interest rates: Established by the market.

5. Exchange rate. Free-floating

6. Trade liberalization: The idea of protecting industries was seen as an obstacle to growth.

7. Liberalization of foreign direct investment

8. Privatization
9. Deregulation: Fostering Competition in Latin America

10. Property rights

After the 2008 crisis, the BIS proposed the Basel Accords to safeguard the integrity of the
international financial system. It proposed the use of a regulatory framework for financial entities,
Basel III, for 2022. This includes greater regulation of both local and international financial agents
and seeks to limit exposure to volatility.

Elasticity

Capacidad de una commodity de cambiar su precio porque hay competencia.

--

Clase 2

The Global Financial System

The Global Financial System is a set of institutions that allow the exchange of funds in a
global level and include a set of rules that regulate the finance of projects and deals
between borrowers and lenders. In other words, the idea of this system is to allow to those
economic agents to transfer money from investors to borrowers and make it easier for
investors to finance projects.

The Financial Global System is composed of many layers. This structure includes
regulators who are intended to supervise banking institutions such as commercial banks
and hedge funds, to ensure that markets are working accordingly and that the income is
being distributed in the spirit of social objectives. In other words, we have regulated
entities, regulators, and economic agents that work on a supranational level.

Components

The Financial Global System is composed by the following institutions:

 International Monetary Fund: Created to help developing countries and lend money
as a last resort to countries in need of monetary support.
  World Bank: It arose after the Second World War as there was Europe was
devastated and had to be reconstructed; the idea was to provide the funding
needed to help the countries affected by the war. This funding includes education
and economic support for projects of reconstruction.
 World Trade Organization: This institution was created to be a regulator in
international trading disputes and to promote international commerce.
 Bank of International Settlements: The Bank of International Settlements is in
charge of supervising central banks, fostering international monetary cooperation,
creating an environment of trust between the central banks, reinforcing
transparency among them, and providing liquidity when needed.
 Institute of International Finance: The Institute of International Finance is a global
association of financial institutions composed of commercial and investment banks
all over the world. According to the IIF Institute of International Finance (2022)
association offers a source of financial research and provides data about emerging
economies and developments in international financial markets.

References:

 IIF (2022). Research. IIF Institute of International Finance.

https://www.iif.com/Research

The Global Financial System

The Global Financial System is a set of institutions that allow the exchange of funds in a global
level and include a set of rules that regulate the finance of projects and deals between borrowers
and lenders. In other words, the idea of this system is to allow to those economic agents to
transfer money from investors to borrowers and make it easier for investors to finance projects.

The Financial Global System is composed of many layers. This structure includes regulators who
are intended to supervise banking institutions such as commercial banks and hedge funds, to
ensure that markets are working accordingly and that the income is being distributed in the spirit
of social objectives. In other words, we have regulated entities, regulators, and economic agents
that work on a supranational level.

Components

The Financial Global System is composed by the following institutions:

• International Monetary Fund: Created to help developing countries and lend money as a
last resort to countries in need of monetary support.

• World Bank: It arose after the Second World War as there was Europe was devastated and
had to be reconstructed; the idea was to provide the funding needed to help the countries
affected by the war. This funding includes education and economic support for projects of
reconstruction.

• World Trade Organization: This institution was created to be a regulator in international

trading disputes and to promote international commerce.

• Bank of International Settlements: The Bank of International Settlements is in charge of

supervising central banks, fostering international monetary cooperation, creating an environment
of trust between the central banks, reinforcing transparency among them and providing liquidity
when needed.

• Institute of International Finance: The Institute of International Finance is a global

association of financial institutions composed of commercial and investment banks all over the
world. According to the IIF Institute of International Finance (2022) association offers a source of
financial research and provides data about emerging economies and developments in
international financial markets.

Difference between International Monetary System and International Financial System

IMS: This is a set of flows and institutions that establish the quantity of M4. The objective is to
support currencies.

IFS: They promote the transfer of money between economic agents.

The instruments are issued by national sunational governments and private economic agents, all
of them with different credit risk.

+Stocks Market: Economic agents can buy or sell shares on the ownership of public companies. -->
If you buy a stock it means that you own a tiny part of the company.

+Commodities market: Economic agents can buy or sell raw materials.

+Forex Market: Economic agents can buy or sell currencies.

+Derivatives Market: Economic agents can buy or sell financial derivatives on the other markets.

There are differnt markets in the financial system. *bond - bono

+Debt Market: Economic agents can buy or sell private or government debt instruments. -->
Payment promises.

Teh debt market has two main divisions, government payment and privament payment. The
federal government in any country is free of credit risk in their own currency. This means that if a
country asks for money in other currency they will be facing a credit risk even if they are asking for
money as governments.

The economic agents can buy or sell the following debt instruments: *Federal agencies,
municipalities, financial insitutions and corporations issue zero-coupon bonds. *Face value or
nominal value is the original cost. Maturity es el tiempo que dura el trato.

+Zero coupon bond: this is sold at discount and not paying interest. A zero-coupon bond is often
purchased to meet a future expense (college cost, anticipated expenditure in retirement). Most
bonds make regular insterest or "coupon" payments, but these are bonds that pay no interest.
With them you buy the bond at a discount from the face value of the bond and pay the face
amount when the bond matures.

*A coupon is the money promised to be paid in a certain amount of time.

*The formula is Price of bond equals face value / (1+ r)n

Face value is the future value of the bond

r is the required rate of return of interest rate and n is the number of years until maturity.

Example: you might pay 3.500 to purchase a 20 year zero coupon bond with a face value of 10000,
after 20 years, the issuer of the bond pays you 10000.

Example 2: 10 pesos face value y rate 0.085 de interest. Time sería 180 days y estos se usan en
proporción del año (360).

Rate in period sería rateXtime. The zero coupon bond value today is face value/(1+rating period) y
eso es lo que pagarías por el bond

*Estos son short term bonds.

1. Zero coupon bond:

 2. +Fixed coupon bond: It pays a fixed interest and its face value at maturity. Its value
changes with the current interest rate.
3. +Floating coupon bond: It pays a floating interest at each period's beginning and its face
value at maturity.
4. +Redeemable bonds: It may be fixed or floating coupon but may be paid at any time. The
person who bought it may call it at any moment.
5. +Convertible bonds: It may be fixed or floating coupon but it can be converted into stocks
under contract restrictions.
6. +Eurobonds: An international bond, denominated in a different currency of the country
where it is issued.

Fixed Coupon Bond

Stock Market

Economic agents can buy or sell shares on the ownership of public companies as:

• Common stocks: Security that represents ownership in a corporation with full voting rights
on the board of directors
 • Preferred stocks: Security that represents ownership in a corporation with limited voting
rights (only on closure, merger, acquisition or spin-off)

• American Depositary Receipts: Negotiable certificate, issued by a U.S. depositary bank

representing a specified number of shares of a foreign company's stock. GDR

• Master Limited Partnerships: A company organized as a publicly traded partnership.

Formed by general partners, manage the MLP, and limited partners, investors in the MLP

• Special Purpose Acquisition Company: A company with no commercial operations, formed

strictly to raise capital (IPO) for acquiring an existing company

• Exchange Trade Fund: A diversified pool of assets (like a mutual fund), publicly traded

• Real Estate Investment Trusts: Companies that own income-producing real estate

• Mutual and Hedge funds: Private owned and managed portfolios, traded as a single asset

• https://www.sifma.org/resources/research/fact-book/

Commodities Market

Economic agents can buy or sell raw materials

• Agriculture: Grain, oilseeds, livestock, dairy, fertilizer and lumber

• Energy: Crude and refined, natural gas and coal.

• Equity Index: S&P, Nasdaq, Russell, Dow Jones and International indices.

• FX: G10 and Emerging markets.

• Interest Rates: US Treasuries, Eurodollars, Fedfunds, Mexican TIIE, swap futures, SONIA
(Sterling Overnight Index Average) and SOFR (Secured Overnight Financing Rate)

• Metals: Precious, base and ferrous metals

• Swaps:

• Cryptocurrencies: Bitcoin and Ether

• Environmental, Social and Governance (ESG): Bioenergy, wáter and scrap

• https://www.cmegroup.com/markets.html?redirect=/markets/

Forex Markets

Economic agents can buy or sell currencies. FOREX is highly volatile and dangerous. There are
certain companies trying to make deals on forex markets, but the company is created on
jurisdiction outside Mexico, so if there is a scam it can be very expensive to sue that company.
 • Spot: two-day delivery transaction

• Swap: Two parties exchange currencies for a certain length of time and agree to reverse
the transaction at a later date

• Forward: A buyer and seller agree on an exchange rate for any date in the future.

• Futures: Contracts specifying a standard volume of a particular currency to be exchanged

on a specific settlement date

• Options: The contract owner has the right but not the obligation to exchange money
denominated in one currency into another currency at a pre-agreed exchange rate on a
specified date

• Non-deliverable forward: Forward contract without real delivery

Derivatives Market

Economic agents can buy or sell financial derivatives on the other markets instruments

• Options: European, and exotic options

• Futures

• Swaps

• Credit Default Obligations

• Credit Default Swaps

• Other exotic derivatives

Mexican Financial System Regulators

 Comisión Bancaria y de
Valores (Banking and
Securities Commission)

Comisión Nacional de
Comisión Nacional de
Sistema Para el ahorro
Seguros y Fianzas
para el retiro (National
(National Insurance and
System Commission for
Surety Commission)
retirement savings)

Comisión para la
Instituto de Protección al Protección y Defensa de
Ahorro Bancario los Usuarios de servicios
(Institute for the Financieros (Commission
Protection of Bank for the Protection and
Savings) Defense of Users of
Financial Services)

Clase 3

Mundell Fleming Mode

The Mundell Fleming Model is an economic model created by Robert Mundell and Marcus
Fleming, it is based on the assumption of fixed price level and shows the interaction between the
goods market and the money market. It explains the causes of short-run fluctuations in aggregate
income in an open economy.

The impossible trinity: A nation cannot have free capital flows, independent monetary policy and a
fixed exchange rate simultaneously. Lebanon maintained the 3 policies simultaneously, hence the
crises.
A nation must choose on side of this triangle and give up the opposite corner.