IF MEANS:  International finance (also referred to as international monetary economics or international macroeconomics) is the branch of financial economics broadly concerned with monetary and macroeconomic interrelations between two or more countries

Dynamics  Global financial system  International monetary system  Balance of payments  Exchange rates  Direct investment  International trade

SCOPES  1. International Economics:- This is related to the concerned with Causes and effects of financial flows among nations, where apllication of MACROECONOMICS comes into the scene with its Theory and policy to the global economy. 2. IFM:- Concerned with HOW Individual economic units (MNCs) cope up with the complex financial environment of IB. 3. IF Markets:- Concerned with FOREX markets,financial or Investment instrument Securities Market et

HISTORY  Historical overview of exchange rate regimes:  Classical Gold Standard: Pre  Bretton Woods System:  Floating Exchange Rates:  European Monetary Union

A Short History of Fixed Exchange Rates  “Gold standard”: (prior to the 1929 Stock Market crash) a nation’s currency was directly convertible into gold at a fixed exchange rate  Gold flowed out of a country that ran a balance of payments deficit  Gold flowed into a country that ran a balance of payments surplus  This fixed exchange rate regime was seen as a form of discipline on countries to maintain a balance of interest rates and trade, though it was subject to breakdown if a country ran low on gold

 Countries went off the gold standard as domestic needs took precedence over orderly international trade relations  Protectionism curtailed trading between countries – SDepression of  moot-Hawley tariff of 1930  World War II

 Bretton Woods: 1944 agreement which established a new fixed currency regime with the dollar as the anchor and in turn, the dollar was tied to gold at a fixed price of $35 per ounce  Led to the creation of the International Monetary Fund, the World Bank, the General Agreement on Tariffs and Trade (today’s World Trade Organization)

 Inflation in the 1960’s and consequent escalating commodities prices led President Nixon to “close the gold window” in August 1971, effectively ending the Bretton Woods exchange rate regime.

 Floating exchange rate: exchange rate between two currencies can move in price each day  Value of currencies is determined by supply and demand in marketplace.

Floating Exchange Rates  Under the floating exchange rate regime, international businesses must account for currency translation risk.  Currency translation risk: risk that value of foreign currency changes in a way which makes business less profitable, absent an exchange rate “devaluation”

 Exchange rate of a particular currency with U.S. dollar is either: 1. How many dollars it takes to buy one unit of foreign currency 2. How many units of foreign currency it takes to buy one dollar  Cross rate (American perspective): exchange rate between two foreign currencies because it can be calculated by multiplying their rates relative to the U.S. dollar

European Monetary Union (EMU MU  1979 – 1998: European Monetary System  Objectives:  To establish a “zone of monetary stability” in Europe.  To coordinate exchange rate policies vis-à-vis non European currencies.  To pave the way for the European Monetary Union.  EMU (1999-): A single currency for most of the European Union.

Recent trend in IF  Improved std & transparency  Sound financial regulation & supervision  More flexible exchange rate regimes  Improved surveillance of national policies  Management and regulation of the capital account  Orderly debt workouts during liguidity and insolvency crises