monetary and exchange system

8/18/2019 Monetary and Exchange System

1/28

Balance of Payments and

Foreign Exchange

International Business

Lecture 2b


2/28

Factors of InternationalBusiness

• Production of Goods and Services

• Routes Roads and !rans"ortationSystem

• !echnological #evelo"ment

• #evelo"ment of $onetary and

Exchange System• %dvertising &orld &ide


3/28

• !oday &e &ant to tal' about nationalmonetary system before &e discussinternational monetary system

• %nd in(uence and determination ofExchange Rate


4/28


5/28

Foreign Exchange Rate

Foreign exchange rates )the "rice ofone country*s currency in terms ofanother*s+ are im"ortant becausethey a,ect the "rice of domestically"roduced goods sold abroad and thecost of foreign goods bought

domestically-


6/28

Factors %,ecting Exchange Rate .Long Run

• !he theory of "urchasing "o&er "aritysuggests that long/run changes in theexchange rate bet&een t&o countries*

currencies are determined by changes inthe relative "rice levels in the t&ocountries-

• 0ther factors that a,ect exchange rates inthe long run are tari,s and 1uotas im"ortdemand ex"ort demand and "roductivity-


7/28

#eterminants of Exchange Rate .Short Run

3. In the short run, exchange rates are determinedby

changes in the relative ex"ected return on domestic

assets &hich cause the demand curve to shift-

%ny factor that changes the relative ex"ected return ondomestic assets &ill lead to changes in the exchange

rate-

Such factors include changes in the interest rates

on domestic and foreign assets as &ell as changes inany of the factors that a,ect the long/run exchange

rate and hence the ex"ected future exchange rate-


8/28

#eterminants of ExchangeRate

4. The asset market approach to exchange ratedetermination can ex"lain both the volatility ofexchange rates and the rise of the dollar in the 345.346 "eriod and its subse1uent fall-

5. Forecasts of foreign exchange rates are veryvaluable

to managers of 7nancial institutions because

these rates in(uence decisions about &hich assets

denominated in foreign currencies the institutionsshould hold and &hat 'inds of trades should be made

by their traders in the foreign exchange mar'et-


9/28

%bsolute Purchasing Po&erParity

In short exchange rate bet&een t&ocountries is e1ual to the ratio of "ricelevels of them- !his is absolute Purchasing

Po&er Parity )PPP+ theory &hich may bedenoted by


10/28

Relative Purchasing Po&erParity

• !he absolute PPP &as ultimatelyrevised to relative PPP theory &hichasserts that "ercentage change in

exchange rate bet&een t&o countriesis e1ual to the di,erence of "ercentagechanges in their "rice level


11/28

• 89e : 89Pd /89Pf

• 0r

•

;hen < is inflation rate• 89e : < d /


12/28

Fisher E,ect

• Fisher !ect, named after Irving Fisherstates that nominal interest rates in eachcountry are e1ual to the re1uired real rate of

return "lus com"ensation for ex"ectedin(ation-

• i = r + π

• i$ = r $ + π $ , i> = r > + π >

•

• i= nominal interest rate, r = real interestrate and π is the expected inflation


13/28

• International Fisher !ect orFisher-Open states that the s"otexchange rate should change in an

amount e1ual to but in o""ositedirection of the di,erence in interestrates bet&een t&o countries-

i$-i> : r $ + π $ - r > - π > = π $ - π > =100x (S t-1 - S t )/ S t .... (approx.)


14/28

Bangladesh ?istory of FERate

•Immediately before Inde"endence Pa'istani Ru"ee &as "egged &ithPound Sterling- @" to #ecember A 3 C:Rs- A-AA

•From Danuary 32 C : !'- 4-34- Pegged to a single currencynamely Pound Sterling-

•$ay 3C : !'-A5

•Since 3 Re/7xed 4 occasions during 2 %"ril 3/ A %ugust33

•%ugust 33 Pegged to multi"le currencies i-e- !rade ;eightedBas'et $ethod 6 urrenciesH C #$ >- C being interventioncurrency

• Danuary 34A !rade ;eighted Bas'et $ethod &ith currenciesIntervention currency @S -

• Duly 343!rade ;eighted Bas'et $ethod &ith 5 currencies

•335 Single Rate !rade ;eighted Bas'et daily monitoring throughcalculation of REER to maintain "urchasing "o&er "arity-


15/28

• From 3 to 335 multi"le exchange rates &ere allo&ed )Ex"ort bene7tsli'e Ex"ort Bonus Scheme KPL KPB ?ome Remittance Scheme etc-+

• 34A a "egged to a bas'et "olicyH through monitoring REER calculated onthe basis of a bas'et containing currencies of 5 countries-

• @" to A #ecember 33 a Secondary Exchange $ar'et existed

•

!he SE$ rate and the 0Mcial rates have been uni7ed from Danuary332-

• Since Duly 33A 7rst ste" to&ards currency convertibility &as ta'en-

• onvertibility on current transactions &as ado"ted in Duly 33A-

• Forex rates &ere used to be calculated everyday on the basis of "reviousday*s REER of the currencies dollar being the intervention currency-

onvertibility on ca"ital accounts is not under consideration-

• Bangladesh !a'a &as (oated since $ay 255A &ithout any trouble-


16/28

International FinanceN $oOmir $ra'

Page

;hat*s in the Balance/of/Payments%ccounts

• !hree sub/accountsH urrent %ccount a"italand Financial %ccount =et errors andomissions

$erchandise !rade

Services

Transactions Within the Current Account

Income recei"tsH Income derived from

o&nershi" of assets such asdividends on holdings ofstoc' and interest onsecurities

!ransfers

http://www.bsi.si/html/financni_podatki/hit/placilne_bilance_1994_1999.htmlhttp://www.bsi.si/html/financni_podatki/hit/placilne_bilance_1994_1999.html


17/28


Page

ransactions !ithin the

"apital and #inancial cco%nt • lassi7cation of transactions according to theth Edition of the Balance of Payments $anual)characteristics of transactions+

"apital #ccountH a"ital transfers !ransfer of title to 7xed assets debt forgiveness etc-

Financial #ccountH #irect InvestmentH

%t least a ten "ercentage share of the foreign investorin the ca"ital of the economic subOect the foreigninvestor invested in


18/28


Page 4

ransactions !ithin the "apital and #inancial cco%nt

Financial #ccount)continued$H Portfolio investmentH

Less than ten "ercent share of the foreign investor

0ther investmentH !rade credits and all other ty"es of long/term and short/

term borro&ing abroad )exce"t securities+ includingI$F credits and ban' credits

International monetary reservesH Foreign assets under the control of the central ban'

$onetary gold S#R assetsReserve "osition of the country in the I$F


19/28


Page 3

&rrors and 'missions om"lete recording of transactions is im"ossible

Errors and omissions re(ect the statistical discre"ancyof recording the B0P transactionsH #i,erence bet&een recorded credit statements and

recorded debit statements

Reasons for errors and omissionsH

Incom"lete recording of transactions bet&een residentsand non/residents !ax evasion !ime discre"ancy bet&een the occurrence of the

transaction and its settlement @nregistered international merchandise trade

Incom"lete data about the Qesca"e of ca"ital and aboutthe 7nancial transactions in o,shore centers


20/28


Page 25

- ;hat %re Balance/of/PaymentsSur"luses and #e7cits

• Sum of the B0P statements is al&ays ero H – %utonomous transactionsH

• Goals unrelated to the balance of "ayments

– %ccommodating )com"ensatory+ transactionsH

• Finance the di,erence bet&een autonomous credits andautonomous debits in B0P

– %utonomous credits T autonomous debitsH sur"lus

;hichtransactions areautonomous

$erchandise tradebalanceurrent accountbalanceBasic balance

0verall balance


21/28


22/28

0=UE=!I0=S I=

F0REIG=

EK?%=GE

$%RVE!


23/28

)+%uoting ;all Street Dournal

%rgentina )Peso+ 5-3355 -555

"o%ntr%in* Sellin*

Bid %s' )0,er+

&'$(igits Four after decimal

)A+Three letters

xchange )ame @S #ollar @S# Bangladeshi !'- B#!

Indian Rs- I=R

Pa'istani Rs- PVR


24/28

)6+ %uotation *ystem Price #irect Wuotation

Indirect Wuotation

In (hakaPrice#irect WuotationH

@S# : B#! 5-5555

Indirect WuotationH

B#! : @S# 5-5 or 5-5


25/28

5. )otation

e : !a'a "er @S#

e + : Xen "er @S#

. *pread

%s' / BidSell / Buy

-. oints &i$

@S# : IRS -A55 %s'

: IRS -A555 Bid

YYYYYYYYYYY

5-555 "oints


26/28

4- ross RateB!d )s

S*o# /PS 494$$$ 495$$$

%/S 15$$ 145$$

'ross %//PS 15$$/495$$$ 145/494$$$ - $6 - $666

'ross /PS%/ 494$$$/145$$ 495$$$/15

-157$7 - 15789

(*t+'rs .id diid'd b o0n s3 *t+'rs s diid'd

b o0n .id)


27/28

/. 0alue date1(elivery date

• 2ank )ote ∗ !ravelers #emand

∗ S"read is high

∗ Ualue date H Immediate

*pot arket ∗ S"ot Rate

∗ Ualue date or 2 days

∗ S"read very lo&

• ∗

Largest $ar'et• ∗ 0"en 26 hours

• ∗ 2A months transaction is e1ual to =XSE*sone day


28/28

For&ard $ar'et

• )ontacted today for the exchange of currencies at a s"eci7eddate in the future+

∗ 2 A 6 3 2 months

∗ Ualue date Z 2 days

∗

=o forecasting∗ =o S"eculation

∗ Ensure su""ly of currency later

• Forard remium For&ard Rate > S"ot Rate

• Forard (iscount For&ard Rate

monetary and exchange system

Documents