Since March 1973, exchange rates have become much more volatile and less predictable than they were during the €•fixed €– exchange rate period, when changes occurred infrequently. In general the dollar has been volatile and has weakened somewhat over the long run. On the other hand, the Japanese yen and German mark have strengthened. The emerging market currencies have been exceptionally volatile and have generally weakened. In the wake of the collapse of the Bretton Woods exchange rate system, the IMF appointed the Committee of Twenty which suggested various options for the exchange rate arrangement. These suggestions were approved at Jamaica during February 1976 and were formally incorporated into the text of the Second Amendment to the Articles of Agreement, Continue reading
International Business
International Business Management deals with the maintenance and development of a multinational operation across national borders, whose manager has the knowledge and the skills to manage and handle cross-cultural processes, stakeholders and business environments in a right way.
Fixed Exchange Rates, 1945-1973
Fixed Exchange Rates, 1945-1973 The currency arrangement negotiated at Bretton Woods and monitored by the IMF worked fairly well during the post-World War II period of reconstruction and rapid growth in world trade. However, widely diverging national monetary and fiscal policies, differential rates of inflation, and various unexpected external shocks eventually resulted in the system‘s demise. The U.S. dollar was the main reserve currency held by central banks and was the key to the web of exchange rate values. Unfortunately, the United States ran persistent and growing deficits on its balance of payments. A heavy capital outflow of dollars was required to finance these deficits and to meet the growing demand for dollars from investors and businesses. Eventually, the heavy Continue reading
Merchant Rate and Exchange Margin in Foreign Exchange Markets
Merchant Rate The foreign exchange dealing of a bank with its customer is known as merchant business and the exchange rate at which the transaction takes place is the merchant rate. The merchant business in which the contract with the customer to buy or sell foreign exchange is agreed to and executed on the same day is known as ready transaction or cash transaction. As in the case of interbank transactions a value next day contract is deliverable on the next business day and a spot contract is deliverable on the second succeeding business day following the date of the contract. Most of the transactions with customers are on ready basis. In practice, the term ready and spot are used Continue reading
Special Drawing Rights (SDRs)
Special Drawing Rights (SDRs), also known as the paper gold, are a form of international reserves created by the International Monetary Fund (IMF) in 1969 to solve the problem of international liquidity. They are not paper notes or currency. They are international units of account in which the official account of the IMF are kept. Origin of Special Drawing Rights Special Drawing Rights were created through the First Amendment of the Fund Articles of Agreement in 1969 following persistent US deficits in balance of payments to solve the problem of liquidity. Until December 1971, an SDR was linked to 0.88867 gram of gold and was equivalent to US $1. With the break down of fixed parity system after 1973 when Continue reading
Definition of arbitrage and its types
Sometimes companies deal in foreign exchange to make a profit, even though the transaction is not connected to any other business purpose, such as trade flows or investment flows. Usually, however, this type of foreign exchange activities is more likely to be persuaded by foreign exchange traders and investors. One type of profit seeking activity is arbitrage, which is the purchase of foreign currency on one market for immediate resale on another market (in a different country) in order to profit from a price discrepancy. Hence, arbitrage may be defined as an operation that consists in deriving a profit without risk from a differential existing between different quoted rates. It may result from two currencies (also known as Continue reading
Inter bank deals in forex trading
Primary dealers quote two-way prices and are willing to deal either side, i.e. they buy and sell the base currency up to conventional amounts at those prices. However, in interbank markets this is a matter of mutual accommodation. A dealer will be shown a two-way quote only if he / she extends the privilege to fellow dealers when they call for a quote. Communications between dealers tend to be very terse. A typical spot transaction would be dealt as follows: BANK A : “ Bank A calling. Your price on mark — dollar please.” BANK B : “ Forty forty eight.” BANK A : “ Ten dollars mine at forty eight.” Bank A dealer identifies and asks himself for B’s Continue reading