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FINANCIAL ENVIRONMENT
Chapter Three

John Wiley & Sons, c

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Financial Environment
Chapter Three
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1. Historical Role of the US Dollar
2. The Gold Standard
3. The Interwar Years
4. Development of the Current International
Monetary System
• 5. Fixed versus Floating Exchange Rates
• 6. Foreign and Foreign Exchange Rates

• 7. Balance ofJohn
Payments
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1. Historical Role of the US Dollar
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absence of a universal currency
exchange of the dollar based on gold ounce
common denominator in world trade
the dollar in the 70’s, 80’s and 90’s.

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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

• problems
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3. The Interwar Years 1919-1939
• the English pound sterling position
• the US dollar position

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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
exchange rates were both national and
international

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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
– to shorten duration and lessen degree of
disequilibrium
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4. Development of an International
Monetary System (cont)
• The International Bank for Reconstruction
and Development
– The World Bank

• Twin Crises
– oil prices
– foreign debt

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5. Fixed versus Floating Exchange Rates
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–
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problems
free (clean) float
managed float
Exhibit 3-1 “Foreign Exchange Rate
Fluctuations over Past 30 Years”

• Currency Blocs

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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

• Exchange Rate Pass Through
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7. Balance of Payments
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Exhibit 3-5 US Balance of Payments 1980-1996
trade balance
current account balance
capital account

• Direct Investment
• Portfolio Investment
• The Internal and External Adjustments
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