International Monetary System
establishes the rules by which countries must value and exchange their currencies and provides a mechanism for correcting imbalances between a country's international payments and its receipts
Balance of Payments Accounting System
(BOP) records transactions and supplies vital information about the health of a national economy and likely changes in its fiscal and monetary policies
Gold Standard
countries agreed to buy or sell their paper currencies in exchange for gold on the request of any individual or firm, and in contrast to mercantilism's hoarding of gold, to allow the free export of gold bullion and coins
Exchange Rate
the price of one currency in terms of a second currency
Fixed Exchange Rate System
the price of a given currency does not change relative to each other currency
Pegged
when currency is tied to the value of an external commodity, such as gold
Sterling-Based Gold Standard
A standard such that most countries were willing to accept either British pound sterling or gold in settlement of transactions
Floating
when currency value is determined by supply and demand for that currency
Beggar-Thy-Neighbor Policies
policies that competitively devalue currency in order to increase exports and diminish imports
International Bank for Reconstruction and Development
(IBRD) also known as the World Bank, established in 1945 and initially created to help finance struggling European countries post-WW2, but has since been adapted to help build the economies of the world's developing economies
International Development Association
(IDA) established in 1960 and established to provide soft loans to emerging economies
Soft Loans
loans that bear some significant risk of not being repaid, which carry no interest and have long maturities (35-40 years) and debtors are usually given a 10 year grace period. a small service charged by the IDA
International Finance Corporation
(IFC) charged with promoting the development of the private sector in developing countries by acting as an investment banker and providing debt and equity capital for promising commercial activities
Multilateral Investment Guarantee Agency
(MIGA) insures companies against political risk in developing economies
World Bank Group
comprised of the International Development Association, the International Finance Corporation, the Multilateral Investment Guarantee Agency, and the World Bank
Regional Development Banks
organizations that promote the economic development of the poorer countries in their respective regions
International Monetary Fund
(187 members) oversees the functioning of the international monetary system. 6 objectives:
1. To promote international monetary cooperation
2. To facilitate the expansion and balanced growth of international trade
3. To promote exchange stability, to main
quota
deposit that has to be made to become a member of the IMF. must be partly in gold and partly in native currency. Size of this determines voting power in the IMF, counts as part of official reserves, and determines country's borrowing power in the IMF
IMF Conditionality
IMF restrictions contingent to countries borrowing more than 25% of their quota
Convertible Currencies
also known as hard currencies, ones that can be freely exchange for other currencies without legal restrictions
Adjustable Peg
when currencies are pegged to an outside commodity, such as gold, but the pegs themselves can be altered under certain conditions and within certain boundaries.
Triffin Paradox
The concept that a national currency that is also a reserve currency will eventually run a deficit, which eventually inspires a lack of confidence in the reserve currency and leads to financial crisis.
Special Drawing Rights
established in 1967, these can be used to settle official transactions at the IMF, sometimes referred to as paper gold
Smithsonian Conference
Meeting held in Washington, DC, in December 1971, during which central bank representatives from the Group of Ten agreed to restore the fixed exchange rate system but with restructured rates of exchange between the major trading currencies.
Floating Exchange Rate System
system where supply and demand for a currency determine its price in the world market
managed float
also referred to as dirty float, situation where exchange rates are not determined purely by private sector market forces
Jamaica Agreement
� In 1976, it established a managed float system of exchange rates - currencies float against one another with governments intervening only to stabilize their currencies at set target exchange rates.
o It is in contrast to a free floating exchange rate sy
Crawling Pegs
an exchange rate arrangement in which a country pegs its currency to the currency of another nation, but allows the parity value to change at regular time intervals.
European Monetary System
(EMS) organization created to manage relationships among EU members
Exchange Rate Mechanism
(ERM) most EMS members participate in this, which attempts to fix exchange rate between them within plus or minus 2.25% of par value and a floating rate against the US dollar and other currencies. This eventually facilitates the adoption of the euro by th
Plaza Accords
an agreement between the governments of France, West Germany, Japan, the United States, and the United Kingdom, to depreciate the U.S. dollar in relation to the Japanese yen and German Deutsche Mark by intervening in currency markets. Devaluing the dollar
Louvre Accord
A meeting of the central bankers and finance ministers of the G7 nations, minus Italy, that took place in February 1987. The participants announced that the exchange value of the dollar had fallen to a level consistent with "economic fundamentals" and tha
Baker Plan
In 1985, US Treasury Secretary James Baker created a plan that would hopefully provide Latin America with the resources needed to regain growth and defuse the debt crisis with new public and private lending. Baker's Plan suggested instead of lending money
Brady Plan
At the end of the 1980s in Latin America the Bush administration devised the Brady Plan, a new U.S. strategy that emphasized debt forgiveness for highly indebted developing countries. It was created for developed nations to provide new loans to those Lati
Balance of Payments Accounting System
a double-entry bookkepting system designed to measure and record all economic transactions between residents of one country and residents of all other countries during a particular time period. Helps to understand the performance of each country's economy
Current Account
composed of merchandise and service trade, income that is earned from foreign investments, and gifts/unilateral transfers
merchandise export
the sale of a domestic product to a foreign consumer
merchandise import
consumption of a foreign product by domestic consumers
balance on merchandise trade
balance between merchandise exports and imports (neg if + imports, pos if + exports)
service export
sale of a domestic service to a foreign consumer
service import
consumption of a foreign service by a domestic consumer
balance on service trade
balance between service exports and imports
import of the services of capital
income earned by foreigners on their investments in the country of question
export of the services of capital
income domestic residents earn from their foreign investments
Capital Account
records capital transactions (purchase and sale of assets)
Short Term Foreign Portfolio Investments
financial instruments with maturities of one year or less (typically bank related)
Long Term Foreign Portfolio Investments
financial instruments with maturities of greater than one year (typically stocks/bonds)
Capital Inflows
these are credits in the BOP, either foreign ownership of assets in a country increases
Capital Outflows
these are debits in the BOP, either ownership of foreign assets by a country increases, or foreign ownership of assets in a country declines
Official Reserves Account
the level of official reserves held by a national government that are used to intervene in the foreign exchange market and in transactions with other central banks. include gold, convertible currencies, SDRs, and reserve positions in the IMF
Errors and Omissions Account
Used to correct measurement errors in BOP, due to the difficult nature of tracing money in certain industries
Official Settlements Balance
reflects changes in a country's official reserves, in essence records the net impact of central banks interventions in the foreign exchange market to support the local economy
Foreign Exchange
the commodity that consists of currencies issued by countries other than one's own
Derived Demand
demand that is determined by foreigners desire for domestic goods, services, and assets
Direct Exchange Rate
also known as a direct quote, this is the price of foreign currency denominated in terms of domestic currency
Indirect Exchange Rate
also known as a indirect quote, this is the price of domestic currency denominated in terms of foreign currency
Transaction Currency
the currency used to facilitate most currency exchange
Commercial Customers
engage in foreign exchange transactions as part of their normal activities, such as importing/exporting goods and services, purchasing/selling foreign assets and investments, or receiving dividends and interest on foreign investments. Also use market to h
Speculators
people that trade currency hoping to correctly predict changes in the market value of currency
Arbitrageurs
people that attempt to exploit small differences in the price of a currency between markets, attempting to make riskless transactions by buying and selling currencies instantaneously
inconvertible currencies
also known as soft currencies, currencies that are not freely tradeable
spot market
consists of foreign exchange transactions that are to be consummated immediately
forward market
consists of foreign exchange transactions that are to occur sometime in the future
swap transaction
transaction in which the same currency is bought and sold simultaneous
currency future
a contract that resembles a forward contract on a standard delivery date
currency option
allows, but doesn't require, a firm to buy or sell a specified amount of a foreign currency at any time up to a specified date
put option
grants the right to sell the foreign currency in a currency option
call option
grants the right to buy the foreign currency in a currency option
forward discount
if the forward price is less than the spot price using a direct quote
forward premium
the forward price is higher than the spot price
arbitrage
the riskless purchase of a product in one market for immediate resale in a second market in order to profit from a price discrepancy
purchasing power parity
a measure of how many units of currency are needed in one country to buy the amount of goods and services that one unit of currency will buy in another country
Two Point arbirtrage
also known as geographic arbitrage, buying one currency and then reconverting it back into the starting currency to make a profit
Three Point Arbitrage
converting into one currency, then converting that currency into an intermediate currency and then back into the starting currency to make a profit
cross rate
exchange rate between two currencies denominated by a third currency
Covered Interest arbitrage
arbitrage that occurs when the difference between two countries' interest rates is not equal to the forward discount/premium. It is the most important form of arbitrage in the foreign-exchange market
International Fisher effect
principle that a difference in nominal interest rates supported by two countries' currencies will cause an equal but opposite change in their spot exchange rates
correspondent relationship
an agent relationship whereby one bank acts as an agent for another bank in the first bank;s home country, and vice versa
subsidiary bank
a bank that is separately incorporated from its parent bank
branch bank
a bank that is not separately incorporated from its parent bank
affiliated bank
an overseas operation in which a bank takes part ownership of in conjunction with a local or foreign partner
Eurodollars
US dollars deposited in any bank account outside the US
London Interbank Offer Rate
LIBOR, determines interest on Euroloans (loans made in non US currency), and is the interest rate that London banks charge each other for short-term Eurocurrency loans
International Banking Facility
(IBF) an entity of a US bank that is legally distinct from the bank's domestic operations and that may offer only international banking services
Foreign Bonds
bonds issued by a resident of one country that are sold to residents of another country and are denominated in the currency of the recipient country
Eurobond
bond issued in the currency of one country but is sold to residents of multiple countries
Global Bond
large, liquid financial asset that can be traded anywhere at any time. Use was pioneered by the world bank.