Foreign exchange and the international monetary system
Download
1 / 19

Foreign Exchange and the International Monetary System - PowerPoint PPT Presentation


  • 700 Views
  • Updated On :

Foreign Exchange and the International Monetary System. Chapters 19, 20. Foreign exchange market. OTC (several hundred dealers, mostly banks) Wholesale vs. retail Transactions size: $1 million or larger Daily volume in excess of $1 trillion/day. Purchasing Power Parity Theory.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Foreign Exchange and the International Monetary System' - HarrisCezar


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
Foreign exchange and the international monetary system l.jpg

Foreign Exchange and the International Monetary System

Chapters 19, 20

Maclachlan, Money & Banking Spring 2006


Foreign exchange market l.jpg
Foreign exchange market

  • OTC (several hundred dealers, mostly banks)

  • Wholesale vs. retail

  • Transactions size: $1 million or larger

  • Daily volume in excess of $1 trillion/day

Maclachlan, Money & Banking Spring 2006


Purchasing power parity theory l.jpg
Purchasing Power Parity Theory

A method of calculating exchange rates that attempts to value currencies at rates such that each currency will buy an equal basket of goods.

Creates a balance in trade. When a country has an inflation, its currency depreciates.

Maclachlan, Money & Banking Spring 2006


Volatility in forex market not explained by ppt l.jpg
Volatility in forex market not explained by PPT

Purchasing power changes slowly.

Most forex trading is not to finance import/export traded.

Maclachlan, Money & Banking Spring 2006


Asset demand theory l.jpg
Asset Demand Theory

Exchange rates adjust so that expected returns across assets of equal risk are equalized.

So if the expected return on European assets is higher than ones in the U.S. assets, the value of the Euro will appreciate.

In equilibrium all expected returns are equal.

Maclachlan, Money & Banking Spring 2006


19 th century gold standard l.jpg

1 oz of gold = $20 = £4

£1 = $5

Suppose £1 = $5.25.

What’s the arbitrage opporunity?

Liberty Gold Dollar (1849-1854)

19th Century Gold Standard

Maclachlan, Money & Banking Spring 2006


Bretton woods agreement 1944 l.jpg
Bretton Woods Agreement 1944

Established a system of fixed exchange rates.

Major architect of agreement J.M. Keynes called gold a “barbarous relic.”

Maclachlan, Money & Banking Spring 2006


Nixon closes the gold window 1971 l.jpg
Nixon Closes the Gold Window (1971)

1960’s inflation in US

Accumulation of $’s in ROW

German CB requests gold for $’s.

Nixon refuses to honor agreement signaling the beginning of the end of fixed exchange rates.

Maclachlan, Money & Banking Spring 2006


Exchange rate interventions l.jpg

Unsterilized

CB enters into forex market to influence value of currency.

E.g. Fed buys $ to keep value high.

Sterilized

CB enters into forex market and then conducts OMO to keep money supply constant.

E.g. Fed buys $ in forex market and then conducts expansionary OMO.

Exchange Rate Interventions

Maclachlan, Money & Banking Spring 2006


Effect of interventions l.jpg
Effect of Interventions

Evidence shows sterilized interventions have little effect.

Consider, Germany during final years of BW.

Buying dollars, selling DM and then buying DM to prevent inflation.

No matter how many dollars they bought they couldn’t get the exchange rate at BW levels.

Maclachlan, Money & Banking Spring 2006


Debt instruments l.jpg

Debt Instruments

Chapter 4

Maclachlan, Money & Banking Spring 2006


Present value l.jpg
Present Value

What is a future cash flow (FV ) worth now?

Maclachlan, Money & Banking Spring 2006


Rule of the cash flow timeline l.jpg
Rule of the Cash Flow Timeline

Cash flows at the same date can be added together, but cash flows at different dates cannot be added together.

Maclachlan, Money & Banking Spring 2006


Four types of credit market instruments l.jpg
Four Types of Credit Market Instruments

1. Simple loan

Maclachlan, Money & Banking Spring 2006


2 fixed payment or amortized loan l.jpg
2. Fixed Payment, or Amortized, Loan

Examples: car loans, mortgages

Maclachlan, Money & Banking Spring 2006


3 coupon bond l.jpg
3. Coupon Bond

Most bonds with maturities greater than a year are of this form.

Coupons bonds issued by

  • Federal government (Treasurys)

  • State and local governments (munis)

  • Corporations (corporates)

Maclachlan, Money & Banking Spring 2006



Special type of coupon bond consol or perpetuity l.jpg
Special Type of Coupon Bond: Consol or Perpetuity Spring 2006

Fixed coupon received forever.

Maclachlan, Money & Banking Spring 2006


4 discount or zero coupon bond l.jpg
4. Discount, or Zero Coupon, Bond Spring 2006

Identical in cash flow structure to a simple loan. The difference is that there’s an active secondary market for zero coupon bonds.

Maclachlan, Money & Banking Spring 2006


ad