Chapter 12 The International Financial System ©2000 South-Western College Publishing

2 What is the international financial system? The numerous rules, customs, instruments, facilities, markets and organizations through which international payments are made and through which funds flow across borders

3 Eurobonds - are denominated in a currency other than that of the country where they are marketed Foreign bonds - are underwritten and sold to investors in the currency of the country where the bond is sold, while the issuer of the bond is from a foreign country Yankee CDs - are dollar dominated CDs issued by branches of foreign banks located in the United States Eurodollar CDs - are dollar dominated CDs issued primarily by foreign branches of U.S. banks Exhibit

4 Fixed Exchange Rate System An exchange rate system where currency values do not fluctuate, such as the Bretton Woods Accord

5 Official Reserve Currency The currency in terms of which other countries define their own currency; the U.S. dollar was the official reserve currency under the Bretton Woods Accord

6 Bretton Woods Accord An agreement in 1944 between major industrialized countries that established fixed exchange rates with the U.S. dollar serving as the official reserve currency

7 Official Reserve Account The balance of payment account that records official government transactions in the foreign exchange market to bring the balance of payments into balance

8 Devalue Under a fixed exchange rate system, to decrease the value of a country’s currency that makes year loans to poor, but not the poorest countries, charging an interest rate just above the rate at which the bank borrowed

9 Revalue Under a fixed exchange rate system, to increase the value of a country’s currency

10 Floating (flexible) Exchange Rate System An exchange rate system where currency values are determined by supply and demand and fluctuate in response to changes in supply and demand

11 Supply of Dollars Demand for Dollars Marks / Dollar Quantity of Dollars / Month A 2 B 1

12 Supply of Dollars Demand for Dollars Marks / Dollar Quantity of Dollars / Month A 2 B 1

13 Managed Float Exchange Rate System A system where currency values fluctuate with changes in supply and demand but where central banks may intervene if currency values are thought to be over- or under-valued

14 Cracking the Code: Foreign Exchange Market Country U.S. Dollar equiv. Currency per U.S. $ Thu Wed Thu Wed Germany The Wall Street Journal (1)(2)(3)(4)

15 International Monetary Fund (IMF) An organization of 182 countries created in 1944 to oversee the monetary and exchange rate policies of its members Member countries pay quotas that are used to assist countries with temporary imbalances in their balance of payments

16 World Bank An investment bank created in 1944 that issues bonds to make low interest rate, long term loans to poor countries for economic development projects

17 Special Drawing Rights (SDRs) International reserve assets created by the IMF to supplement other international reserves

18 International Bank for Reconstruction and Development (IBRD) A bank affiliated with the World Bank that makes year loans to poor, but not the poorest, countries charging an interest rate just above the rate at which the bank borrowed

19 International Development Association An association affiliated with the World Bank that makes interest free loans with a year maturity to the world’s poorest countries

20 International Finance Corporation An organization that mobilizes funding for private enterprise projects in poor countries Legally separate from but works closely with the World Bank

21 Bank for International Settlements (BIS) An international financial organization created in 1930 to promote international cooperation among central banks and provide facilities for international financial operations