international monetary system

Topics: Foreign exchange market, Bretton Woods system, Currency Pages: 14 (3763 words) Published: September 24, 2013
MODULE 10
International Monetary System

Learning Objectives:
1.Explain how exchange rates influence the activities of domestic and international companies. 2.Identify the factors that help determine exchange rates and their impact on business. 3.Describe the primary methods of forecasting exchange rates. 4.Discuss the evolution of the current international monetary system, and explain how it operates.

Chapter Outline:

Introduction
How Exchange Rates Influence Business Activities
Desire for Stability and Predictability
What Factors Determine Exchange Rates?
Law of One Price
Big MacCurrencies
Purchasing Power Parity
Role of Inflation
Impact of Money-Supply Decisions
Impact of Unemployment and Interest Rates
How Exchange Rates Adjust to Inflation
Role of Interest Rates
Fisher Effect
Evaluating Purchasing Power Parity
Impact of Added Costs
Impact of Trade Barriers
Impact of Business Confidence and Psychology
Forecasting Exchange Rates
Efficient Market View
Inefficient Market View
Forecasting Techniques
Fundamental Analysis
Technical Analysis
Difficulties of Forecasting
Evolution of the International Monetary System
Early Years: The Gold Standard
Par Value
Advantages of the Gold Standard
Collapse of the Gold Standard
Bretton Woods Agreement
Fixed Exchange Rates
Built-In Flexibility
World Bank
International Monetary Fund
Special Drawing Right (SDR)
Collapse of the Bretton Woods Agreement
Smithsonian Agreement
Final Days
A Managed Float System Emerges
Jamaica Agreement
Later Accords
Today’s Exchange-Rate Arrangements
Pegged Exchange-Rate Arrangement
Currency Board
European Monetary System
How the System Worked
Recent Financial Crises
Developing Nations’ Debt Crisis
Mexico’s Peso Crisis
Southeast Asia’s Currency Crisis
Russia’s Ruble Crisis
Argentina’s Peso Crisis
Future of the International Monetary System
Bottom Line for Business
Impact on Business Strategy
Forecasting Earnings and Cash Flows

A comprehensive set of specially designed PowerPoint slides (designated ‘PPT’ below) is available for use with Chapter 10. These slides and the lecture outline below form a completely integrated package that enhances the learning of this chapter’s material.

LECTURE Outline:

1.INTRODUCTION
This chapter explores factors that determine exchange rates and various international attempts to manage them. It also presents different methods of forecasting exchange rates, and the functioning of the international monetary system.

2.HOW EXCHANGE RATES INFLUENCE BUSINESS ACTIVITIES (PPT #3-7) Exchange rates affect demand for products. When a country’s currency is weak, the price of its exports declines, making the exports more appealing on world markets. Devaluation is the intentional lowering of the value of a currency by the nation’s government. Gives domestic producers an edge on world markets, but also reduces citizens’ buying power. Revaluation is the intentional raising of the value of a nation’s currency. Increases the price of exports and reduces the price of imports. Exchange rates affect profits earned abroad when repatriated by the parent company into the home currency. Translating subsidiary earnings from a weak host country currency into a strong home currency reduces earnings, and vice versa. A.Desire for Stability and Predictability

1.Stability makes for accurate financial planning and cash flow forecasts. 2.Predictability reduces odds that a company will be caught off-guard by unexpected rate changes. Reduces the need for costly insurance (currency hedging) against possible adverse exchange rates.

3.WHAT FACTORS DETERMINE EXCHANGE RATES?
To understand what determines rates, must know: (1) the law of one price, and (2) purchasing power parity. Each tells the level at which an exchange rate should be.

A.Law of One Price (PPT #8-9)
1.Exchange rates do not guarantee or stabilize the buying power of a currency; purchasing power...
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