MGMT1101 Lecture Notes - Lecture 8: Impossible Trinity, Currency Board, Financial Statement
Week 8: Money makes the world go round: Foreign exchange
1. Explain the forces that influence exchange rates
International financial markets:
1. Foreign exchange market: includes interbank market and securities exchange
2. International capital market: includes the bond market, the equities market and eurocurrency
market
Exchange rate: the rate at which one currency is converted into another
• Determined by supply and demand for different currencies
• These 3 factors impact future exchange rates
o Coutr’s prie iflatio
o Coutr’s iterest rate
o Market psychology
2. Outline the nature and functions of foreign exchange markets, and the international
monetary system and its institutions
The foreign exchange market:
• Convert currencies
• Manage foreign exchange rate risk
International monetary system:
• Comprises institutional arrangements that countries adopt unilaterally and multilaterally to
govern exchange rates
• These institutions include:
o Exchange rate regimes and policies
o Bretton Woods
o International Monetary Fund (IMF)
o World Bank
3. Assess the effectiveness of different exchange rate regimes in reconciling national policy
goals and the goal of international monetary stability
Exchange rate regimes:
• Exchange rate regimes or systems range from fixed to free-floating exchange rate systems
o Floating exchange rate: foreign exchange market alone determines the relative
value of a currency; that country is adhering to a floating exchange rate
o Pegged exchange rate: value of a currency is fixed to a reference currency and then
the exchange rate between that currency and other currencies is determined by the
reference currency exchange rate
• Managed float (dirty float): when value of a currency determined by market forces, but with
central bank intervention
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Document Summary
Week 8: money makes the world go round: foreign exchange: explain the forces that influence exchange rates. International financial markets: foreign exchange market: includes interbank market and securities exchange, international capital market: includes the bond market, the equities market and eurocurrency market. The foreign exchange market: convert currencies, manage foreign exchange rate risk. International monetary system: comprises institutional arrangements that countries adopt unilaterally and multilaterally to govern exchange rates, these institutions include, exchange rate regimes and policies, bretton woods, world bank. International monetary fund (imf: assess the effectiveness of different exchange rate regimes in reconciling national policy goals and the goal of international monetary stability. Functions of an international monetary system: adjustment: an adjustment mechanism to correct internal and external imbalances. Liquidity: sufficient international liquidity: confidence: to underpin system stability. It no longer polices a particular exchange rate regime: surveillance: continues to monitor and consult members on national + international consequences of their economic and financial policies.
