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International Finance. Overview Bill Reese. Learning Objectives. In this unit we will learn: The history of XRs in the U.S. The different types of XR regimes What the Federal Reserve is What the Euro is How the FX market operates. Gold Standard. 1876 – 1913

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international finance

International Finance

Overview

Bill Reese

learning objectives
Learning Objectives
  • In this unit we will learn:
    • The history of XRs in the U.S.
    • The different types of XR regimes
    • What the Federal Reserve is
    • What the Euro is
    • How the FX market operates
gold standard
Gold Standard
  • 1876 – 1913
  • Values of currency set against precious metals
    • Each country set own conversion rate
    • Must maintain adequate reserves (Fort Knox) for redemption
gold standard1
Gold Standard
  • Gold standard implied fixed XR
  • Limited growth of money supply for any country
    • Need enough gold
  • WWI limited free movement of gold
1920s and 1930s
1920s and 1930s
  • Some countries reverted to gold standard
  • Some abandoned
  • Some pegged to dollar or pound
  • Period of instability
    • International trade declined
bretton woods agreement
Bretton Woods Agreement
  • International agreement in 1944
  • Fixed exchange rates
    • All currencies pegged to dollar
    • Dollar set at $35/ounce of gold
    • Intervention to prevent fluctuation of > 1%
  • Lasted until 1973
floating exchange rates
Floating Exchange Rates
  • By 1971, dollar had depreciated
  • Concerns about U.S. ability to convert dollars to gold
  • March 1973
    • U.S. allows dollar to float
    • Other major currencies float as well
floating exchange rates1
Floating Exchange Rates
  • Determined by supply and demand
  • Factors affecting demand
    • Demand for nation’s product
    • Demand for nation’s stocks and bonds
    • Inflation expectations
    • Government stability
floating exchange rates2
Floating Exchange Rates
  • Supply is determined by monetary policy of central bank
  • U.S. central bank is the Federal Reserve
  • Too much supply – inflation
  • Not enough supply - recession
federal reserve
Federal Reserve
  • U.S. Central Bank
    • Established in 1913
    • 12 federal reserve banks
federal reserve1
Federal Reserve
  • Board of Governors
    • Seven members
      • Appointed by President and confirmed by congress
      • 14-year term
      • Chairman’s term is four years
federal reserve2
Federal Reserve
  • FOMC
    • Chief policymaking committee
      • All 7 governors
      • President of NY fed bank
      • Four other fed presidents
        • All fed presidents attend meetings
    • All votes are equal
      • Chairman has much influence
federal reserve3
Federal Reserve
  • FOMC determines monetary policy
    • Supply of money
      • Purchase or sell fixed income assets
      • Influences short-term rates
      • Impacts XR
federal reserve4
Federal Reserve
  • Mission
    • Maximum employment
    • Stable prices
    • Moderate long-term interest rates
  • Goals may conflict
    • XR is not explicit goal
slide17
Euro
  • Launched Jan. 4, 1999
    • 11 original members
      • Belgium, Germany, Spain, France, Ireland, Italy, Luxembourg, Netherlands, Austria, Portugal, Finland
    • Greece, Cyprus, Estonia, Malta, Slovenia and Slovakia have joined since then
slide18
Euro
  • Requirements for entry
    • Nominal inflation < 1.5% above average for three members with lowest inflation rates during previous year
    • Long-term rates < 2% above average for three members with lowest interest rates
slide19
Euro
  • Requirements for entry
      • Fiscal deficit < 3% of GDP
      • Government debt < 60% of GDP
slide20
Euro
  • Advantages
    • Lower transaction costs
    • Less XR risk
    • Greater price transparency and price-based competition
foreign exchange market
Foreign Exchange Market
  • Spans the globe
  • Operates 24 hours/day
  • Major exchanges
    • Singapore, Hong Kong, Tokyo, Bahrain, London, New York, San Francisco, Sydney
foreign exchange market1
Tokyo

opens

Asia

closing

10 AM

In Tokyo

Europe

opening

Americas

open

London

closing

Afternoon

in America

6 pm

In NY

Lunch

In Tokyo

Foreign Exchange Market
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