Management of Forex Transactions

The International Monetary System

Need for IMS ‡ World wide transactions ‡ To facilitate transfer of funds between parties ‡ Conversion of national currencies into one another ‡ Acquisition and liquidation of financial assets ‡ International credit creation .

Organisation and functioning of the international monetary system 1. 3. 5. 4. 2. Exchange rate regimes International Liquidity The International Monetary Fund The Adjustment process Currency Blocks .

procedures and institutional framework for determining exchange rates at a point in time and changes in them over time. including factors which induce the changes.Exchange rate regimes ‡ Exchange rate ± value of one currency in terms of another ‡ Exchange Rate regime ± mechanism. .

Exchange rate regimes ‡ Large number is possible ‡ Two extremes are Perfectly rigid or fixed exchange rates and Perfectly flexible or floating exchange rates ‡ Between them are hybrids with varying degrees of Limited flexibility .

Exchange rate regimes ‡ The regime during first 4 decades of 20th century ± Gold standard ‡ Followed by a system (lasted till 1973) ± Fixed but adjustable exchange rates ‡ Later Non-System .

The Gold Standard ‡ ‡ Oldest system Beginning of the First world war 1. Gold Specie Standard Actual currency in circulation consisted of gold coins with a fixed gold content .

. They are ready to convert on demand unlimited amounts of paper currency into gold and vice versa.e central banks. Gold Bullion Standard Basis of money remains a fixed weight of gold but currency in circulation consists of paper notes with the monetary authorities i. at a fixed conversion ratio.The Gold Standard 2.

Gold exchange standard The authorities stand ready to convert. the paper currency issued by them into the paper currency of another country which is operating a gold ± specie or gold ± bullion standard. . at a fixed rate.The Gold Standard 3.

³Mint parity´ rate of exchange ‡ Exchange rate between any pair of currencies will be determined by their respective exchange rates against gold. ‡ Transportation and storing cost .

Three rules under The Gold standard 1. There must be free flows of gold between countries on gold standard 3. money supply must contract and vice versa . If this amount decreases. They must fix once-and-for-all the rate of conversion of the money issued by them into gold 2. The money supply in the country must be tied to the amount of gold the monetary authorities have in reserve.

Failure of Gold standard ‡ It imposes very rigid discipline on the policy makers ‡ Often domestic policy goals have to be sacrificed ‡ GREAT DEPRESSION .

victorious allied powers «US and UK took up the task of thoroughly revamping the world monetary system for the non-communist world.The Bretton Woods System ‡ Following the second world war. ‡ Outcome was ³Bretton Woods System´ ‡ 2 supera-national institutions International Monetary Fund (IMF) and The World Bank .

The Bretton Woods System ‡ The exchange rate regime that was put in place can be characterised as the Gold Exchange Standard ‡ The novel feature of the regime which makes it an adjustable peg system was that the parity of a currency against the dollar could be changed in the face of a fundamental disequilibrium. The degree of freedom was not available to the USA. .

The Bretton Woods System ‡ A fundamental disequilibrium is said to exist when. the currency repeatedly faces balance of payments disequilibria and has to constantly intervene and sell foreign exchange or buy foreign exchange against its own currency .Deficits is much more difficult to deal with and calls for a devaluation of the home currency . at the given exchange rate.

Other member countries of the IMF agreed to fix the parities of their currencies vis-à-vis the dollar with variations within 1% on either side. undertook to convert the US dollar freely into gold at a fixed parity of $35 per ounce. 2. The US govt.The Bretton Woods System Features of Bretton woods system 1. .

If the exchange rate hit either of the limits. the monetary authorities of the country were obliged to ³defend´ it by standing ready to buy or sell dollars against their domestic currency to any extent required to keep the exchange rate within the limits .The Bretton Woods System 3.

( oil price crisis in 1973) .Bretton Woods System ‡ On August 15. 1971 the US government abandoned its commitment to convert dollars into gold at the fixed price of $35 per ounce. ‡ In 1973 the world moved to a system of floating rates.

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