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FINANCIAL ENVIRONMENT
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Financial Environment
Chapter Three
• 1. Historical Role of the US Dollar • 2. The Gold Standard
• 3. The Interwar Years
• 4. Development of the Current International Monetary System
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1. Historical Role of the US Dollar
• absence of a universal currency
• exchange of the dollar based on gold ounce • common denominator in world trade
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2. The Gold Standard
• par values
• three major features
– system of fixed exchange rates
– limited rate of growth in a country’s money supply
– automatic adjustment tool
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3. The Interwar Years 1919-1939
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4. Development of Today’s International
Monetary System
• The Bretton Woods Conference in New Hampshire in 1944
– ruled out return to the gold standard
– free floating exchange rates could not work – need for a monetary system to recognize that
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4. Development of an International
Monetary System (cont)
• The International Monetary Fund (IMF)
– to promote international monetary cooperation – to facilitate expansion and balanced growth of
international trade
– to promote exchange stability
– to assist in establishment of a multilateral system of payments
– to give members temporary use of availability of funds
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4. Development of an International
Monetary System (cont)
• The International Bank for Reconstruction and Development
– The World Bank
• Twin Crises
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5. Fixed versus Floating Exchange Rates
– problems
– free (clean) float – managed float
– Exhibit 3-1 “Foreign Exchange Rate Fluctuations over Past 30 Years”
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6. Foreign Exchange and Foreign
Exchange Rates
• Purchasing Power Parity (PPP)
– Exhibit 3-2 “ The Big Mac Index”
• Forecasting Exchange Rate Fluctuation
– Exhibit 3-3 “Factors Influencing Foreign Exchange Rates”
• Coping with Exchange Rate Fluctuations • Spot versus Forward Foreign Exchange
– Exhibit 3-4 “Exchange Rates Fri May 23, 1997
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7. Balance of Payments
– Exhibit 3-5 US Balance of Payments 1980-1996 – trade balance
– current account balance – capital account
• Direct Investment • Portfolio Investment
