Assignment Title: IFM Individual Assignment
Submitte By: Ahtesham Yousaf
Question No 1:
Ans:
A currency board is a system of consolidating the monetary policy with the exchange rates. Currency board has a direct impact on exchange rates and monetary policy. It’s a base system which also includes fiscal policy and have direct impact on interest rates. Over time with change legal and institutional requirements there is a strong need of currency exchange rate management to impose consistency in local policies and international commitments like imports and exports, international investments.
What is meant by currency boards?
FLOATING EXCHANGE RATE
Floating exchange rate is a system under which exchange rates between two countries is based
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Estonia followed by establishing an exchange rate fixed to German mark (DM)on 20 June 1992, and is now linked to the euro. Lithuania, influenced by Estonia’s success, However later Bank of Lithuania steps in to replace the currency board-like system withcentralised banking. To manage inflation and declining economy,
Bulgaria adopted currency board which was linked to German mark and now it is linked to euro.
In Argentina, for example,
The minimum foreign reserve ratio is not 100 percent, as for an orthodox currency board,but 66 percent. Though the actual foreign reserve ratio hovers around 90 percent, the legalfreedom the central bank has to reduce foreign reserves has at times created speculativeattacks on the currency.
Singapore had a currency board until 1973, but since then the Monetary Authority of
Singapore has maintained a floating exchange rate. Though the Monetary Authority ofSingapore holds net foreign reserves equal to about 100 percent of the monetary base.
Advantages Disadvantages
• Domestic currency rises only when foreign exchange reserves increase.
• Monetary authority can’t use money for government spending.
• A currency board solve the of
Since the inception of Euro in 1999, it has been used as the main currency by euro zone nations, which has 17 member states today. It did not take a long for Euro to be recognized as the second mostly used, traded and reverse currency in the world, but recently Euro has lost its shine, being in a difficult situation.In this part of the paper, we will illustrate why there are dangers about the stability and the efficacy of Euro as a common currency for Europe.
Long has it been taken for granted that all countries must have their own domestic currency with reasons ranging from trading issues to fiscal revenues and other financial variables. When taking a look at the argument for the trading issues it can be said that modification flexibility of the exchange rate allows domestic governing authorities to alter relative prices by depreciating the domestic currency in such a fashion that encourages exports and at the same time discouraging imports. There are several arguments on the financial side, which all relate to central banks money printing abilities and their power to adjust the value of their currency, thus making them to detach the domestic financial markets from the conditions established in the international ones, and to perform as a lender of last resort when a crisis threatens the domestic financial system. Seigniorage, which involves the domestic government being able to tax the domestic currency, is definitely an argument on the fiscal side. If the need for more money in the form of bills and coins arise, the government can produce them as “no interest” coins and bills and are allowed to do with it what they see fit. Most, if not all, of these advantageous characteristics are threatened when a country decides to dollarize.
To put it simply, the exchange rate is a price. As with any other market, price is determined by supply and demand. Whenever they are not equivalent, the exchange rate would change. However, the reality comes to be far more complicated.
The use of foreign exchange arises because different nations have different monetary units, and the currency of one country cannot be used for making payments in another country. Because of trade, travel, and other transactions between individuals and business enterprises of different countries, it becomes necessary to convert money into the currency of other countries in order to pay for goods or services in those countries. The transfer of money values from one country to another and the determination of the price at which the currency of one country will be surrendered for that of another constitute the main problems of foreign exchange. Foreign exchange is a commodity, and its price fluctuates in accordance with supply and demand. Exchange rates are published daily in the principal newspapers of the world. By international agreement fixed exchange rates with a narrow margin of fluctuation existed until 1973, when floating rates were adopted that fluctuate as supply and demand dictate.
It’s mandatory for all the banks to deposit a certain determined percentage of their assets with the central bank to make sure that the banks’ customer deposits are safe. These percentages are what the central bank adjusts to reduce or increase the banking lending ...
Exchange rate volatility is high risk towards MNC, it has been considered to make more uncertainty than fluctuations of interest rate or inflation rate. Exchange rate variability that results from the floating exchange rate system, it is the main sources of macroeconomic uncertainty that affect the operation of company in an open economy and influences the profitability
Under the linked exchange rate system, the Hong Kong dollar is linked to the U.S. dollar at the rate of HKD 7.8 to USD 1. Unlike the fixed exchange rate regime implemented in other economies, under the linked exchange rate system, the government or the de facto central bank of Hong Kong, HKMA does not actively interfere in the foreign exchange market by controlling the supply and demand of the Hong Kong dollar in order to influence the exchange rate. According to John Greenwood (2008), the linked exchange rate system is a currency board system, which requires both the stock and flow of the monetary base to be fully backed by foreign reserves. This implies that any change in the monetary base is fully matched by the corresponding change in foreign reserves at a fixed exchange rate. According to the HKMA, the monetary base of Hong Kong is made up of the following four components: 1). Certificates of Indebtedness; 2). Government-issued notes and co...
The foreign exchange market is one of the most important financial markets. It influences the relative price of goods between countries and can shape trade. It influences the price of imports and can have an effect on a country’s price level (inflation rate). In addition, it influences the international investment and financing decisions. Exchange rates present many risks to a company and a company must be able to hedge itself (Gray, 2003).
The currency exchange rate is one of the important factors which affect balance of payment of a country. A balance of payments (BOP) sheet is an accounting record of all monetary transactions between a country and the rest of the world. These transactions include payments for the country's exports and imports of goods, services, and financial capital, as well as financial transfers. Sources of funds for a nation, such as exports or the receipts of loans 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 a negative or deficit item. Foreign exchange is the methods and instruments used to adjust the payment of debts between two nations that employ different currency systems. A nation's balance of payments has an important effect on the exchange rate of its currency. Bills of exchange, drafts, checks, and telegraphic orders are the principal means of payment in international transactions. Buying or selling foreign currency in order to profit from sudden changes in the rate of...
Helene Rey states that It is only way to provide independent monetary policy is to have free capital flows ,which leads to have floating exchange rate. According to Helene Rey ‘’ the global financial cycle transforms the trilemma into a dilemma’’. Targeted capital controls, sources of the financial cycle itself by the monetary policy of the Fed and other main central banks,transmission channel by limiting credit growth and leverage,transmission channel by imposing stricter limits on leverage for all financial intermediaries are most significant solution of this global financial cycle or ’’dilemma’’. Since financial cycle is globalized, capital flows, asset prices and credit growth take part in this cycle. Moreover; this cycle based on some indicators but before the explaining this part, I want to say that VIX is indicator of uncertainty and risk aversion of the markets because financial cycle is directly and positively related with the VIX. In general; VIX, foreign direct investment and other types of flows have highly correlated relationship. Capital flows are also positively related to VIX. Also; we can see that portfolio debt is increase as also credit inflow rises.??? Credit flows are ...
Thailand implements a controlled floating exchange rate system, pricing to market forces on the Thai baht, and the Thai central bank would only intervene in the market when necessary, in order to avoid excessive exchange rate volatility to the expected impact of economic policies. At present, the global economic slowdown, domestic demand is not good in Thailand. In order to keep the country's export competitiveness, the Bank of Thailand is more inclined to let the baht weaken.
...y equals the United States. Hence, in this new world of international monetary structure U.S. needs to be very careful about its economic policies or it may lose its dominance over the monetary markets internationally. However, in examining the U.S. economy in the recent past we realize that the trouble has already begun for e.g. The current account deficit jumped by about $100 billion annually during the three-year period 1998-2000, nearing $450 billion or about 4.5 percent of GDP in 2000. The net international investment position of the United States reached a negative $2 trillion at the end of 2000. Hence it is quite possible that in near future the dollar may experience some sharp depreciation, the evidence of which is reflected in the excel sheet attached.
The US, and many countries, used to peg currency to gold. The British Pound used to be equivalent to ¼ ounce of gold. The French Franc was 1/20 ounce of gold. However this pegging was abandoned in the 20th century. Current monetary policy seeks to achieve national economic goals, which often come at the expense of countries with weaker currency.
The foreign exchange markets allow the conversion of currencies, where it helps the firms to conduct trade more efficiently across the national boundaries. In addition, firms can shop for low cost financing in capital markets all over the world and then use the foreign exchange market to convert the foreign currency that they got into whatever currency they require. With the foreign exchange nowadays, anyone can go to other country by converting their domestic currency into the foreign currency. The foreign exchange will follow the rate of exchange according to the country's rate. But still, the foreign exchange market is actually dealing with fluctuation where sometimes it has upward and downward movement.
The first of these exchange rates, nominal, is the number of units of a given currency that can purchase a unit of a given foreign currency (INSERT CITATION). When using this rate, countries are able to value of their own currency relative to one-another when trading in the foreign exchange market. This principle, however, is not exclusive to trading currencies. Similar to the nominal exchange rate, the real exchange rate uses goods and services in place of currency. As a result, it is defined as the amount of goods or services that can be traded in one country for a good or service in another country. Using this rate, countries are able to gauge the competitiveness of their goods and services in trading with any given country, making it a key factor for countries trading in the global economy.