International finance and investments
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International Finance and Investments. What’s different about Int’l Finance?. 1. 2. 3. 4. 5. History of International Monetary System. 1. Bretton Woods agreement in 1944 2. High US inflation in sixties 3. Dollar devaluation in 1971 4. Flexible exchange rates 1973.

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History of international monetary system
History of International Monetary System

  • 1. Bretton Woods agreement in 1944

  • 2. High US inflation in sixties

  • 3. Dollar devaluation in 1971

  • 4. Flexible exchange rates 1973


Exchange rate regimes
Exchange Rate Regimes

  • 1. Free Float ~ $/€, $/£, SF/$

  • 2. Managed Float ~ ¥/$

  • 3. Crawling Peg ~ RMB/$

  • 4. Fixed Rate ~ HK$/$

  • 5. No National Currency ~ Ecuador & Panama use the US dollar; San Marino & Montenegro use the euro

  • 6. Monetary Union ~ eurozone


Conventional fx rate quotations
Conventional FX Rate Quotations

  • 1. €1.3210 ~ means the number of US dollars per euro, or $/€

  • 2. £1.5022 ~ means the number of US dollars per pound, or $/£

  • 3. ¥99.63 ~ means the number of Japanese yen per US dollar, or ¥/$

  • 4. Rmb6.1206 ~ means the number of Chinese yuan per US dollar, or Rmb/$


Forecasting future exchange rates
Forecasting Future Exchange Rates

  • 1. Balance of Payments

    • Current Account ~ trade, services, interest payments

    • Capital Account ~ financial investments, fixed investments

    • Changes in International Reserves ~ foreign currencies, SDRs, Gold and other commodities

    • Errors and Omissions

    • BOP means net of all the above is ZERO.


Forecasting future exchange rates1
Forecasting Future Exchange Rates

  • 2. Use Inflation Differentials

  • Assume that the current rate is €1.3200 and inflation in the United States is 2% while inflation in the eurozone is 1%. What will be the exchange rate for euros be one year from today?

  • Answer: 1.3200 x (1.02/1.01) = 1.3331


Toyota japan sells a car priced in us dollars to a buyer in oregon
Toyota, Japan sells a car, priced in US dollars to a buyer in Oregon

  • Toyota Oregon Buyer

  • Bank of Japan US Treasury Dept.


Balance of payments
Balance of Payments in Oregon

  • 1. Japan exported a car ~ Current Account Surplus

  • 2. Japan bought a US$ T-bill ~ Capital Account Deficit

  • 3. The US imported a car ~ Current Account Deficit

  • 4. The US sold a T-bill~ Capital Account Surplus

  • 5. Net, BOP for both countries is ZERO


Toyota japan sells a car priced in yen to a buyer in oregon
Toyota, Japan sells a car, priced in yen to a buyer in Oregon

  • Toyota Oregon Buyer

  • US Bank

  • Bank of Japan US Try. Dept.


Toyota builds invests a factory in oregon
Toyota builds (invests) a factory in Oregon Oregon

  • Toyota Oregon

  • US Bank

  • Bank of Japan US Try. Dept.


Balance of payments1
Balance of Payments Oregon

  • 1. Japan makes a Foreign Direct Investment (FDI) ~ Capital Account Deficit

  • 2. Japan sells a T-bill back to US Treasury Dept. ~ Capital Account Surplus

  • 3. US receives direct investment ~ Capital Account Surplus

  • 4. US buys a T-bill from Japan ~ Capital Account Deficit


Bop and gdp connection
BOP and GDP Connection Oregon

  • C + I + G + (X-M) = GDP = C + S + T

  • C + I + G + (X-M) = C + S + T

  • I + G + (X-M) = S + T

  • (I –S) + (G-T) + (X-M) = 0

  • (X-M) + (CI – CO) + ∆Int. Res. + (E&O) = 0

  • (I – S) + (G-T) + (X-M) = (X-M) + (CI – CO)

  • (I – S) + (G – T) = (CI – CO)

  • (I – S) + (G – T) + (CO – CI) = 0


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