...Introduction In an open economy, there are no impediments to trade. Goods and services flow freely between business and citizens in one country to their counter parts in another. This section discusses exchange rates, exchange rate adjustments and systems, macroeconomic policy in an open economy, as well as international banking, including international currency reserves, debt, and risk. Learning Materials Open Economy Macroeconomics: Exchange Rates, Balance of Payments and Policy Exchange-Rate Systems With some notable exceptions, most countries in the world have their own currency. Consequently, foreign exchange markets have developed to allow individuals, businesses, governments and other institutions to be able to make payment and receive payment across borders. Each country decides on an exchange rate system, whether they will set their exchange value of their currency administratively, allow markets to determine it, or some combination of those two approaches. Both macroeconomic and microeconomic forces influence the price of each currency in terms of another currency, its exchange rate. Exchange-rate systems include fixed, freely floating, managed floating, fixed peg, crawling-peg currency board, and dollarization. The United States, European Union, United Kingdom and Japan follow managed floating systems. Currency Boards and Monetary Policy Developing countries and small countries with large international sectors are more likely to use fixed systems, peg...
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...Foreign Exchange Market Demond McKeever National University In view of the fact that the international business environment is not set up with a worldwide medium for exchange, the foreign exchange market is a necessity for international trade. The major functions of the foreign exchange market are to transfer purchasing power, allocate open trade for international markets, monitor exchange rates from fluctuating to rigorously, and to aid in the import and export of goods between countries by providing credit for financing international trade (Suranovic, 2005) The foreign exchange market or forex market as it is often called is the market in which currencies are traded. Currency Trading is the world’s largest market consisting of almost trillion in daily volume and as investors learn more and become more interested, the market continues to rapidly grow. Not only is the forex market the largest market in the world, but it is also the most liquid, differentiating it from the other markets. In addition, there is no central marketplace for the exchange of currency, but instead the trading is conducted over-the-counter. Unlike the stock market, this decentralization of the market allows traders to choose from a number of different dealers to make trades with and allows for comparison of prices. Typically, the larger a dealer is the better access they have to pricing at the largest banks in the world, and are able to...
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...the Euro. It was a way of creating an area of currency stability throughout the European Community by encouraging countries to co-ordinate their monetary policies. It used an Exchange Rate Mechanism (ERM) to create stable exchange rates in order to improve trade between EU member states and thus help the development of the single market. Stable money had been a key part of international economic calculations since World War II. However, by the 1980s, opinion about it was much more divided. As a result, not all countries took part in the EMS straight away, and there were deeper splits in the years to come over the role of the EU in setting monetary policy as the EMS was replaced with the Euro. History The EMS was launched in 1979 to help lead to the ultimate goal of EMU that had been set out in the Werner Report (1970). The EMS came about because of the high global inflation and economic stagnation that characterized much of the 1970s. Contributing greatly to these problems was the sorry financial predicament of the United States during this decade. The dollar, which served as a peg for European currencies, was plagued by a ballooning American deficit, the oil crisis, a rapid rise in the demand for gold in world commodity markets, and unemployment and "stagflation" at home. The currency exchange rates of European Community (EC) members fluctuated wildly against the dollar which the Nixon administration, because of domestic demands, refused to devalue. As a result the central...
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...15020448105 | 5 | Mr. Sameep Gadkari | 15020448106 | 6 | Mr. Nandkumar | 15020448015 | 7 | Mr. Bhushan Patil | 15020448027 | 8 | Mr.Vikrant Birje | 15020448056 | Guided By, Prof.S.K.Vaze International Financing TABLE OF CONTENTS Sr. No | Topics | Page No. | 1 | Objectives | 3 | 2 | Foreign Exchange-An Overview | 3 | 3 | Convertibility of Indian Rupee-History | 4 | 4 | Convertibility of Currency-Meaning | 4 | 5 | Current Account Convertibility | 5 | 6 | Capital Account Convertibility * Important Provisions under FEMA | 6,7 | 7 | Convertibility of Indian Rupee-Positive Effects | 9 | 8 | Capital Account Convertibility-Negative Effects | 10 | 9 | Key Points and Analysis | 12 | 10 | Conclusion and Recommendations | 14 | 11 | Bibliography | 15 | Objectives: A. To know Foreign exchange mechanism followed in the past and current practices. B. To understand the concept of “Convertibility of Currency” C. To Study journey of convertibility of Indian rupee pre and post Liberalisation and impact on exchange rate. D. Brief study of Indian laws of regulations and prohibitions in context of the currency convertibility so far. E. Understand the provisions under FEMA. F. Study the other countries policies on ‘convertibility of currency’ and its impact on their economies in brief. G. Study of positive and negative side of convertibility of Indian rupee and...
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...International Trade CONTENTS INTRODUCTION 3 HISTORY 4 IMPORTANCE OF TRADE 5 INTERDEPENDENCE 6 LAW OF COMPARATIVE ADVANTAGE 7 BENEFITS OF DIVERSITY 7 COMPETITIVENESS 8 ECONOMIES OF SCALE 9 FREE TRADE 10 PROTECTIONISM 10 METHODS OF PROTECTIONISM 11 MEASURES OF TRADE 12 Global Trade Risk: 14 Types of Risk, Ways to Manage 14 CONCLUSION 17 REFERENCES 18 INTRODUCTION International trade has a big influence in our day-to-day lives, even if we do not realize it, it is a fact that almost every transaction or purchase we make, we are part of the global economy. This is because products or parts of the products have point of origin all over the world. International trade is the system by which countries exchange goods and services. Countries trade with each other to obtain products that are better quality, lower cost or just different from these goods produced at home. The goods and services that a country buys from other countries are called imports, and goods and services that are sold to other countries are called exports. While trade takes place mostly between businesses, companies and governments, individual also have a frequent participation on buying and selling goods internationally. Most international trade consists of the purchase and sale of industrial equipment, consumer goods, oil and agricultural products. In addition, services such as banking, insurance, transportation, telecommunications, engineering and tourism accounted have a big role and influence, to the point...
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...The Euro is an individual currency that has theoretically been in operation in eleven countries that are members of the European Union. It was introduced in theory in January in the year 1999. The plans for arranging a single currency solidified on 1st January, 2002, when 12 EU member countries stopped using their own individual currencies and declared the Euro as their only currency. The EU has offered to let Britain hold a public vote on whether Britain should use the Euro as part of its economic involvement in the EU. Ever since the Euro has been introduced, it’s performance has been poor when it is compared with the values of the British Pound and the American Dollar. The Euro is a single currency arrangement that came into theoretical operation between 11 members of the European Union in January 1999. On January 1st 2002, 12 EU members got rid of their own currencies and introduced the Euro as their sole currency. If Britain joins the Euro, it will likely be in 2003. The government has offered the British public a referendum on Britain's entry into it though some ministers have clouded the issue as to whether Britain's entry (or not) will be a political or an economic decision. Jack Straw, Home Secretary, has stated that a decision will almost certainly be a political one whereas the Chancellor, Gordon Brown, has stated that the 'Five Tests' will determine whether we join the Euro - i.e., any decision will be an economic one. The Euro’s record since its introduction...
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...its impact on the subsequent evolution of the international political economy. With World War II rapidly coming toward an end, there was a global fear. A fear that the world was going to return to the economic protectionism that led the world economy to the brink of collapse in the 1930's. A new global political system needed to be formed, with the Allies, most importantly America, leading the way. As Robert Skidelsky(2004) puts it in his biography of John Maynard Keynes the U.S wanted to 'destroy Britain’s pre-war financial and trading system, based on the sterling area and imperial preference' and create a new monetary order to regulate the worlds economy. So on the 1st of July 1944, 44 Allied nations met for the Bretton Woods conference, during which the new neo-liberal policies were formed in order to open markets and lower trade barriers and movement of capital. The bretton woods system had three main features- fixed exchange rates(”par values” agreed with the international monetary fund and changed only in consultation with it); currencies that were freely converitble into each other or into gold; and freedom from exchange restrictions, at least on current payments. Controls on capital movements were permitted (Garritsen de Vrie, M. n.d) The Bretton Woods system had two governing bodies, the IMF which was there to give permission to countries to change there currency exchange rate and hand out loans for countries to sort out there current account deficit, and the IBRD...
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...The Euro Debt Crisis: Greece’s and its Next Move Matthew Schrock Financial Markets & Institutions Dr. Victoria Geyfman December 6, 2012 “The Euro Crisis and Greece’s Next Move” The Euro currency, during its original preparation and issuance, had been seen with optimism. It was presumed that the new union of European markets would create a new economic power within Europe, matching it with other economic leaders such as the U.S. and other powers. At this point in history, the Euro seems to be on the brink of despair. The European Monetary Union had determined and established the prerequisite diplomacy and policy making to assure a newly created stable and integrated economy of Europe. The reality of this new currency and monetary union is far from the original optimistic outlook. Policy set forth in the original agreements and conditions of the European Monetary Union that had been established before its adoption had been treated without regard by countries. This disregard started with deceit from Greece but quickly became almost the status quo. Greece is known as the catalyst and a scapegoat within the views of the Euro debt crisis. Greece is on the brink of insolvency and others are following. Options are available in this time of uncertainty, whether they are conventional or not, that could result in Greece remaining within the Euro and accepting austerity or altering their status and participation within the monetary union. The decision that will be...
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...Global Financing and Exchange Rate Mechanisms of Hard and Soft Currencies Renita McBath MGT/448 University of Phoenix December 1, 2011 Professor David Grier Global Financing and Exchange Rate Mechanisms of Hard and Soft Currencies Trading, bartering, buying, and selling are known as the act doing business. The action of doing business has been a way of life for human beings for Centuries. At some point in our history the difficulty of doing business equally became a challenge. For instance, one person would like to trade a jar of jelly to another person that owns cows. The trade is off balance because of the value of each item. The difficulty arose when trying to access a credit. At this point, currency was born. In the beginning, currency was established by villagers in the form of stones, paper, linen, and other countable items. Nowadays humans have evolved currency into unique metal and paper items that have unique values. Currently these uniquely valuable currencies are referred to as hard and soft. Further research will reveal an analysis of the use of the currencies in global financing operations as well as describing the importance of managing risks that may arise. Hard Currency Hard currency is a status associated with the material, paper, and coins that are circulated within a country and globally in an effort to buy and sell goods. Currently, hard currency is the most traded currency. Countries...
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...The exchange rate An exchange rate is the rate at which one currency is exchanged on another one. This rate differs from country to country and depends on many economical variables, the main of which are the general balance and disbalance of economy, monetary and fiscal policy, the state of the budget, international policy, the condition and development of the country’s economy compared to the world situation and dominating countries, purchasing power of the currency, and other internal and external factors. The history of world exchange rate systems shows us that the world community (in its majority) has in fact shifted from the system of fixed exchange rates to floating exchange rate system. Currently there exist different combinations of floating and fixed exchange rate systems, together with specific economical instruments, created for exchange rate regulating. Since the development of production and a number of divisions of labor there existed such a phenomenon as commodity money. There was no other monetary system until 17th century when there appeared coins having an intrinsic value, not linked with commodity. Usually the value of the coin was associated with the content of gold in the coin. The exchange rate between different coins and different currencies depended on the content of gold in the coin as well, and equaled to the relative content of gold in the coins. In 17th century banks started issuing own banknotes which had the same purchasing power as...
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...conventions of the system and tried to frustrate the adjustment process by sterilizing gold inflows. Deficit countries found the adjustment even more difficult because of downward wage and price stickiness. Once the shocks were large and persistent enough, the consequences of forfeiting monetary independence and asymmetric adjustment ultimately undermined the system.5 The gold standard did not survive World War I intact. Widespread inflation caused by money-financed war expenditures and major shifts in the composition of global economic power undermined the pre-war gold parities. Crucially, there was no mechanism to coordinate an orderly return to inflation-adjusted exchange rates. When countries, such as the United Kingdom in 1925, tried to return to the gold standard at overvalued parities, they were forced to endure painful deflation of wages and prices in order to restore competitiveness. Though this was always going to be difficult, it proved impossible when surplus countries thwarted reflation. During the Great Depression, with an open capital account and a commitment to the gold-exchange standard, the United States could not use monetary policy to offset the economic contraction.6 Fidelity to gold meant that the deflationary pressures from the United States spread quickly, further weakening the global economy. Unable to adjust to these...
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...be perhaps the great financial catastrophe in history. Although it traces its roots back to the starting of the millennia, the subsequent meltdown was most gruesome over the past 3 years. What began as a crisis of the sub-prime mortgage market in the United States quickly transcended national borders and developed into a upheaval of epic proportions. What ensued was a systematic debacle of stock exchanges, investment banking, derivatives etc. all financial markets ranging from equity, currency, real estate, futures etc. In order to fully understand the devastation caused by this dilemma, we have to take focus on the core issues and identify the stream of events as they occurred and how they subsequently collapsed global financial markets. Housing Bubble Burst The global financial crisis began through the US sub-prime mortgage market. The past two decades leading up to the year 2005 had experienced phenomenal growth in terms of increases in housing prices. There was an abundance of capital flowing into the country and this translated into excess liquidity available for banks to lend out. The Sub-Prime Mortgage Market refers to a market where people with bad credit history can obtain house loans at relatively better rates. It doesn’t imply that the interest rates are low, but rather they don’t have to go through the rigors they would face due to their poor credit rating. Since the US is the largest consumption economy in the world, which implies the use of credit facilities...
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...limitations of this system of trade paved the path for the introduction of ‘Money’and Money gave birth to the need to exchange different currency:- Foreign Currency trading. The origin of Foreign Exchange (Forex) trading traces its history to centuries ago. The Babylonians are credited with the first use of paper notes and receipts. However, during this phase of history Speculation hardly ever happened. During the middle ages, the introduction of a paper form of governmental I.O.U. gained acceptance. This type of I.O.U. was introduced more successfully through force than through persuasion.These paper bills represented transferable third-party payments of funds, making foreign currency exchange trading much easier for merchants and traders and causing these regional economies to flourish. These I.O.U’s have now become the basis of today's modern currencies. From its infantile stages during the Middle Ages to First World war, the forex markets were relatively stable and without much speculative activity. During this phase, most Central banks supported their currencies with convertibility to gold. This standard had a major weakness called the ‘boom-bust’ pattern. As an economy strengthened (Boom), it would import a great deal from out of the country until it ran down its gold reserves required to support its money; as a result, the money supply would diminish, interest rates escalate and economic activity slowed to the point of recession (Burst). Ultimately, prices of commodities had...
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...Volatility of exchange rate The main objective of this research is to present a rationalized concept of the theory and composition of exchange rate that are compulsory to solve the important economic problems facing the economy in the country, like volatile exchange rate, unbalanced financial circumstances and frustration of government to have control over domestic money market. “Exchange rate” shows that how much unit of onenation’s currency can be purchased with one unit of domestic currency. More precisely, exchange rate is a conversion factor that determines rate of change of currencies. While exchange rates volatility shows that exchange rate is settled on demand and supply of one nation’s currency, it may turn out fastest moving price of currency and bring all the foreign capital in the economy. Exchange rate volatility can influence the decisions of policy makers and affect the volume of exports and imports. It can also affect the allocation of manufacturing of goods, reserve money, exports, imports and balance of payments. Exchange rate volatility provides chances to domestic investors to invest in foreign currency to obtain higher profits and thus domestic currency undervalue and foreign currency gain values. Moreover, this volatility of exchange rate directly influences the prices of exports, imports, reserve money, manufacturing productions and their growth rates. Traders and investors always support the system where the discrepancy of the difference between actual...
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...------------------------------------------------- Balance of payments From Wikipedia, the free encyclopedia Balance of payments (BoP) accounts are an accounting record of all monetary transactions between a country and the rest of the world.[1] These transactions include payments for the country's exports and imports of goods, services, financial capital, and financial transfers. The BOP accounts summarize international transactions for a specific period, usually a year, and are prepared in a single currency, typically the domestic currency for the country concerned. Sources of funds for a nation, such as exports or the receipts ofloans and investments, are recorded as positive or surplus items. Uses of funds, such as for imports or to invest in foreign countries, are recorded as negative or deficit items. When all components of the BOP accounts are included they must sum to zero with no overall surplus or deficit. For example, if a country is importing more than it exports, its trade balance will be in deficit, but the shortfall will have to be counterbalanced in other ways – such as by funds earned from its foreign investments, by running down central bank reserves or by receiving loans from other countries. While the overall BOP accounts will always balance when all types of payments are included, imbalances are possible on individual elements of the BOP, such as the current account, the capital account excluding the central bank's reserve account, or the sum of the two...
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