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1、INTERNATIONALFINANCIALMANAGEMENTEUN / RESNICKFourth EditionINTERNATIONALFINANCIALMANAGEMENTEUN / RESNICKFourth EditionChapter Objective:This chapter serves to introduce the student to the institutional framework within which:International payments are made.The movement of capital is accommodated.Exc
2、hange rates are determined. 2Chapter TwoThe International Monetary SystemlEvolution of the International Monetary SystemlCurrent Exchange Rate ArrangementslEuropean Monetary SystemlEuro and the European Monetary UnionlThe Mexican Peso CrisislThe Asian Currency CrisislThe Argentine Peso CrisislFixed
3、versus Flexible Exchange Rate RegimesChapter Two OutlineEvolution of the International Monetary SystemlBimetallism: Before 1875lClassical Gold Standard: 1875-1914lInterwar Period: 1915-1944lBretton Woods System: 1945-1972lThe Flexible Exchange Rate Regime: 1973-PresentBimetallism: Before 1875lA “dou
4、ble standard” in the sense that both gold and silver were used as money.lSome countries were on the gold standard, some on the silver standard, some on both.lBoth gold and silver were used as international means of payment and the exchange rates among currencies were determined by either their gold
5、or silver contents. lGreshams Law implied that it would be the least valuable metal that would tend to circulate. Classical Gold Standard: 1875-1914lDuring this period in most major countries:nGold alone was assured of unrestricted coinagenThere was two-way convertibility between gold and national c
6、urrencies at a stable ratio.nGold could be freely exported or imported.lThe exchange rate between two countrys currencies would be determined by their relative gold contents.For example, if the dollar is pegged to gold at U.S.$30 = 1 ounce of gold, and the British pound is pegged to gold at 6 = 1 ou
7、nce of gold, it must be the case that the exchange rate is determined by the relative gold contents:Classical Gold Standard: 1875-1914$30 = 6$5 = 1Classical Gold Standard: 1875-1914lHighly stable exchange rates under the classical gold standard provided an environment that was conducive to internati
8、onal trade and investment.lMisalignment of exchange rates and international imbalances of payment were automatically corrected by the price-specie-flow mechanism.Price-Specie-Flow MechanismlSuppose Great Britain exported more to France than France imported from Great Britain.lThis cannot persist und
9、er a gold standard.nNet export of goods from Great Britain to France will be accompanied by a net flow of gold from France to Great Britain.nThis flow of gold will lead to a lower price level in France and, at the same time, a higher price level in Britain.lThe resultant change in relative price lev
10、els will slow exports from Great Britain and encourage exports from France.Classical Gold Standard: 1875-1914lThere are shortcomings:nThe supply of newly minted gold is so restricted that the growth of world trade and investment can be hampered for the lack of sufficient monetary reserves.nEven if t
11、he world returned to a gold standard, any national government could abandon the standard.Interwar Period: 1915-1944lExchange rates fluctuated as countries widely used “predatory” depreciations of their currencies as a means of gaining advantage in the world export market.lAttempts were made to resto
12、re the gold standard, but participants lacked the political will to “follow the rules of the game”.lThe result for international trade and investment was profoundly detrimental.Bretton Woods System: 1945-1972lNamed for a 1944 meeting of 44 nations at Bretton Woods, New Hampshire.lThe purpose was to
13、design a postwar international monetary system.lThe goal was exchange rate stability without the gold standard.lThe result was the creation of the IMF and the World Bank.Bretton Woods System: 1945-1972lUnder the Bretton Woods system, the U.S. dollar was pegged to gold at $35 per ounce and other curr
14、encies were pegged to the U.S. dollar.lEach country was responsible for maintaining its exchange rate within 1% of the adopted par value by buying or selling foreign reserves as necessary.lThe Bretton Woods system was a dollar-based gold exchange standard.Bretton Woods System: 1945-1972German markBr
15、itish poundFrench francU.S. dollarGoldPegged at $35/oz.Par ValuePar ValuePar ValueThe Flexible Exchange Rate Regime: 1973-Present.lFlexible exchange rates were declared acceptable to the IMF members.nCentral banks were allowed to intervene in the exchange rate markets to iron out unwarranted volatil
16、ities.lGold was abandoned as an international reserve asset.lNon-oil-exporting countries and less-developed countries were given greater access to IMF funds.Current Exchange Rate ArrangementslFree Float nThe largest number of countries, about 48, allow market forces to determine their currencys valu
17、e.lManaged Float nAbout 25 countries combine government intervention with market forces to set exchange rates.lPegged to another currency nSuch as the U.S. dollar or euro (through franc or mark).lNo national currencynSome countries do not bother printing their own, they just use the U.S. dollar. For
18、 example, Ecuador, Panama, and El Salvador have dollarized.European Monetary SystemlEleven European countries maintain exchange rates among their currencies within narrow bands, and jointly float against outside currencies.lObjectives:nTo establish a zone of monetary stability in Europe.nTo coordina
19、te exchange rate policies vis-vis non-European currencies.nTo pave the way for the European Monetary Union.What Is the Euro?lThe euro is the single currency of the European Monetary Union which was adopted by 11 Member States on 1 January 1999. lThese original member states were: Belgium, Germany, S
20、pain, France, Ireland, Italy, Luxemburg, Finland, Austria, Portugal and the Netherlands.What are the different denominations of the euro notes and coins ?lThere are 7 euro notes and 8 euro coins. l500, 200, 100, 50, 20, 10, and 5. lThe coins are: 2 euro, 1 euro, 50 euro cent, 20 euro cent, 10, euro
21、cent, 5 euro cent, 2 euro cent, and 1 euro cent. lThe euro itself is divided into 100 cents, just like the U.S. dollar.How did the euro affect contracts denominated in national currency?lAll insurance and other legal contracts continued in force with the substitution of amounts denominated in nation
22、al currencies with their equivalents in euro. Euro ArealAustria lBelgiumlCyprus lCzech RepubliclEstonialFinland lFrancelGermany lGreece lHungarylIreland 22 Countries participating in the euro:lItaly lLatvialLithuanialLuxembourg lMaltalPolandlPortugal lSlovak RepubliclSlovenialSpainlThe NetherlandsTh
23、e Long-Term Impact of the EurolIf the euro proves successful, it will advance the political integration of Europe in a major way, eventually making a “United States of Europe” feasible.lIt is likely that the U.S. dollar will lose its place as the dominant world currency.lThe euro and the U.S. dollar
24、 will be the two major currencies.The Mexican Peso CrisislOn 20 December, 1994, the Mexican government announced a plan to devalue the peso against the dollar by 14 percent.lThis decision changed currency traders expectations about the future value of the peso.lThey stampeded for the exits. lIn thei
25、r rush to get out the peso fell by as much as 40 percent.The Mexican Peso CrisislThe Mexican Peso crisis is unique in that it represents the first serious international financial crisis touched off by cross-border flight of portfolio capital.lTwo lessons emerge:nIt is essential to have a multination
26、al safety net in place to safeguard the world financial system from such crises.nAn influx of foreign capital can lead to an overvaluation in the first place.The Asian Currency CrisislThe Asian currency crisis turned out to be far more serious than the Mexican peso crisis in terms of the extent of t
27、he contagion and the severity of the resultant economic and social costs.lMany firms with foreign currency bonds were forced into bankruptcy.lThe region experienced a deep, widespread recession.The Argentinean Peso CrisislIn 1991 the Argentine government passed a convertibility law that linked the p
28、eso to the U.S. dollar at parity.lThe initial economic effects were positive:nArgentinas chronic inflation was curtailednForeign investment poured inlAs the U.S. dollar appreciated on the world market the Argentine peso became stronger as well.The Argentinean Peso CrisislThe strong peso hurt exports
29、 from Argentina and caused a protracted economic downturn that led to the abandonment of pesodollar parity in January 2002.nThe unemployment rate rose above 20 percentnThe inflation rate reached a monthly rate of 20 percentThe Argentinean Peso CrisislThere are at least three factors that are related
30、 to the collapse of the currency board arrangement and the ensuing economic crisis:nLack of fiscal discipline nLabor market inflexibilitynContagion from the financial crises in Brazil and RussiaCurrency Crisis ExplanationslIn theory, a currencys value mirrors the fundamental strength of its underlyi
31、ng economy, relative to other economies. In the long run.lIn the short run, currency traders expectations play a much more important role.lIn todays environment, traders and lenders, using the most modern communications, act by fight-or-flight instincts. For example, if they expect others are about
32、to sell Brazilian reals for U.S. dollars, they want to “get to the exits first”. lThus, fears of depreciation become self-fulfilling prophecies.Fixed versus Flexible Exchange Rate RegimeslArguments in favor of flexible exchange rates:nEasier external adjustments.nNational policy autonomy.lArguments
33、against flexible exchange rates:nExchange rate uncertainty may hamper international trade.nNo safeguards to prevent crises.Fixed versus Flexible Exchange Rate RegimeslSuppose the exchange rate is $1.40/ today.lIn the next slide, we see that demand for British pounds far exceed supply at this exchang
34、e rate.lThe U.S. experiences trade deficits.Fixed versus Flexible Exchange Rate RegimesSDQ of Dollar price per (exchange rate)$1.40Trade deficitDemand (D)Supply (S)Flexible Exchange Rate RegimeslUnder a flexible exchange rate regime, the dollar will simply depreciate to $1.60/, the price at which su
35、pply equals demand and the trade deficit disappears. Fixed versus Flexible Exchange Rate RegimesSupply (S)Demand (D)Demand (D*)D = SDollar depreciates (flexible regime)Q of Dollar price per (exchange rate)$1.60$1.40Fixed versus Flexible Exchange Rate RegimeslInstead, suppose the exchange rate is “fi
36、xed” at $1.40/, and thus the imbalance between supply and demand cannot be eliminated by a price change.lThe government would have to shift the demand curve from D to D* nIn this example this corresponds to contractionary monetary and fiscal policies.Fixed versus Flexible Exchange Rate RegimesSupply (S)Demand (D)Demand (D*)D* = SContractionary policies(fixed regime)Q of Dollar price per (exchange rate)$1.40End Chapter Two