1. FINANCIAL ENVIRONMENT Chapter Three
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2. Financial Environment Chapter Three
1. Historical Role of the US Dollar
2. The Gold Standard
3. The Interwar Years
4. Development of the Current International Monetary System
5. Fixed versus Floating Exchange Rates
6. Foreign and Foreign Exchange Rates
7. Balance of Payments
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3. 1. Historical Role of the US Dollar
absence of a universal currency
exchange of the dollar based on gold ounce
common denominator in world trade
the dollar in the 70’s, 80’s and 90’s.
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4. 2. The Gold Standard par values three major features problems
system of fixed exchange rates
limited rate of growth in a country’s money supply
automatic adjustment tool
problems
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5. 3. The Interwar Years 1919-1939 the English pound sterling position
the US dollar position
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6. 4. Development of Today’s International Monetary System
The Bretton Woods Conference in New Hampshire in 1944
ruled out return to the gold standard
free floating exchange rates could not work
need for a monetary system to recognize that exchange rates were both national and international
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7. 4. Development of an International Monetary System (cont)
The International Monetary Fund (IMF)
to promote international monetary cooperation
to facilitate expansion and balanced growth of international trade
to promote exchange stability
to assist in establishment of a multilateral system of payments
to give members temporary use of availability of funds
to shorten duration and lessen degree of disequilibrium
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8. 4. Development of an International Monetary System (cont)
The International Bank for Reconstruction and Development
The World Bank
Twin Crises
oil prices
foreign debt
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9. 5. Fixed versus Floating Exchange Rates
problems
free (clean) float
managed float
Exhibit 3-1 “Foreign Exchange Rate Fluctuations over Past 30 Years”
Currency Blocs
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10. 6. Foreign Exchange and Foreign Exchange Rates
Purchasing Power Parity (PPP)
Exhibit 3-2 “ The Big Mac Index”
Forecasting Exchange Rate Fluctuation
Exhibit 3-3 “Factors Influencing Foreign Exchange Rates”
Coping with Exchange Rate Fluctuations
Spot versus Forward Foreign Exchange
Exhibit 3-4 “Exchange Rates Fri May 23, 1997
Exchange Rate Pass Through
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11. 7. Balance of Payments Direct Investment Portfolio Investment
Exhibit 3-5 US Balance of Payments
trade balance
current account balance
capital account
Direct Investment
Portfolio Investment
The Internal and External Adjustments
John Wiley & Sons, c 1998