Attributes of the Ideal Currency: If the ideal currency existed in today‘s world, it would possess three attributes: Fixed value. The value of the currency would be fixed in relationship to other major currencies so that trades and investors could be relatively certain of the foreign exchange value of each currency in the present and into the near future. Convertibility. Complete freedom of monetary flows would be allowed, so that traders and investors could willingly and easily move funds from one country and currency to another in response to perceived economic opportunities or risks. Independent monetary policy. Domestic monetary and interest rate policies would be set by each individual country so as to pursue desired national economic policies, especially as they might relate to limiting inflation, combating recessions, and fostering prosperity and full employment. Unfortunately, these three attributes usually cannot be achieved at the same time. For example, countries whose Continue reading
International Finance
International finance is the branch of economics that studies the dynamics of foreign exchange,foreign direct investment and how these affect international trade. Also studies the international projects, international investment and the international capital flow .International Finance can be broadly defined, as the study of the financial decisions taken by a multinational corporation in the area of international business i.e. global corporate finance. International finance draws much of its background from the preliminary studies in the topics of corporate finance such as capital budgeting, portfolio theory and cost of capital but now viewed in the international dimension.
Global Scenario of Exchange Rate Arrangements
Firms engaged in international business must have an idea about the exchange rate arrangement prevailing in different countries as this will facilitate their financial decisions. In this context, it can be said that over a couple of decades, the choice of the member countries has been found shifting from one form of exchange rate arrangement to the other, but, on the whole, preference for the floating rate regime is quite evident. At present as many as 35 of a total of 187 countries have an independent float, while the other 51 countries have managed floating system. The other 7 countries have a crawling peg, while 53 countries have pegs of different kinds. The EMU and other 20 countries of Africa and the Caribbean region come under some kind of economic and monetary integration scheme in which they have a common currency. Lastly, nine countries do not have their own currency Continue reading
Detailed Information about Bretton Woods Exchange Rate System and The Special Drawing Rights (SDRs)
Bretton Woods Exchange Rate System (1944) In 1944, as World War II drew toward a close, the Allied Powers met at Bretton Woods, New Hampshire, in order to create a new post-war international monetary system. The Bretton Woods Agreement, implemented in 1946, whereby each member government pledged to maintain a fixed, or pegged, exchange rate for its currency vis-Ã -vis the dollar or gold. These fixed exchange rates were supposed to reduce the riskiness of international transactions, thus promoting growth in world trade. The Bretton Woods Agreement established a US dollar-based international monetary system and provide for two new institutions, The IMF and the World Bank. The IMF aids countries with balance of payments and exchange rate problems. The International Bank for Reconstruction and Development (World Bank) helped post-war reconstruction and since then has supported general economic development. The IMF was the key institution in the new international monetary system, and Continue reading
Detailed information about The Gold Standard Exchange Rate System
The Gold Standard (1876 — 1913): A system of setting currency values whereby the participating countries commit to fix the prices of their domestic currencies in terms of a specified amount of gold. The gold standard as an international monetary system gained acceptance in Western Europe in the 1870s. The United States was something of a latecomer to the system, not officially adopting the standard until 1879. The rules of the game under the gold standard were clear and simple. Each country set the rate at which its currency (paper or coin) could be converted to a weight of gold. The United States, for example, declared the dollar to be convertible to gold at a rate of $20.67/ounce of gold (a rate in effect until the beginning of World War 1). The British pound was pegged at £4.2474/ounce of gold. As long as both currencies were freely convertible into gold, Continue reading
Foreign Exchange Control in India
Any transaction in foreign Exchange is governed by Foreign Exchange Management ACT 1999. The FERA had its origin by defense of India rules (DIR) 1935. This control was exercised in order to ensure the foreign exchange particularly due to severe constraints on exchange reserve due to Second World War. Later on 23 March 1947 this rule became in the State Book as Foreign Exchange Regulation Act 1947. Later this act modified with certain amendments in 1973 and become effective from 01.01.1974. Further relaxation of this affect was effected since 1994. The same was repealed from 1st June, 2000 and all foreign exchange transactions from this date will be governed by the provisions of the Foreign Exchange Management Act 1999. As per the foreign exchange Management Act 1999 the Reserve Bank of India principally controls the movement of the Foreign Exchange of the country. As per sec 11 (1) of FEMA, Continue reading
Role of FEDAI in Foreign Exchange
Authorized Dealers in Foreign Exchange (Ads) have formed an association called Foreign Exchange Dealers Association of India (FEDAI) in order to lay down certain terms and conditions for transactions in Foreign Exchange Business. Ad has to given an undertaking to Reserve Bank of India to abide by the exchange control and other terms and conditions introduced by the association for transactions in foreign exchange business. Accordingly FEDAI has evolved various rules for various transactions in order to protect the interest of the exporters, importers general public and also the authorized in dealers. FEDAI which is a company registered under Section 25 of the companies Act, 1956 has subscribed to the 1. Uniform customs and practice for documentary credits (UCPDC) 2. Uniform rules for collections(URC) 3. Uniform rules for bank to bank reimbursement. Various rules of FEDAI Rules No 1. of FEDAI deals with hours of business of banks which is Continue reading