|



 
 



@


 


A ©


 

 × or 


 × is the price of one country¶s currency in units
of another currency or commodity
± The system is classified as a ©
× ©  × or


 

± The rate at which the currency is fixed× or pegged× is
frequently referred to as its 

± If the government doesn¶t interfere in the valuation
of its currency× the currency is classified as ©  
or ©

@


 


¦ u 

  is the quoted price for the foreign
exchange to be delivered at once× or in two days for
interbank transactions
± Example: ¥114/$ is a quote for offering 114 yen to buy one
US dollar for immediate delivery.
¦ 


  is the quoted price for foreign exchange
to be delivered at a specified date in the future. The rate
today for future delivery.
± Assume the 90-day forward rate for the Japanese yen is
¥112/$
± No currency is exchanged today× but after the expiry of 90
days 112 yen will be delivered in exchange of one U.S.
dollar×i.e. pre agreed rate.
± This can be guaranteed by a ©


 

@


 



¦ 


 or   is the

percentage difference between the spot and
forward exchange rate

¦    ©

 refers to a drop

in foreign exchange value of a currency
that is pegged to gold or another currency
± In other words× the 
 is reduced
± The opposite of    is
  
@


 



¦ [×  

 × or 
   of a

currency refers to a drop in foreign exchange
value a floating currency. The opposite of
 is 
  or appreciating×
which refers to a gain in the exchange value of a
floating currency
¦ u © or  describes a currency that we expect
to devalue or depreciate relative to major
currencies; 
 or 
 is the opposite
The Gold Standard× 1876-1913

± Countries set par value for their currency in terms of

gold
± This came to be known as the  
and
gained acceptance in Western Europe in the 1870s
± The US adopted the  
in 1879
± The ³Rules Of The Game´ for the  

were:
¦ Example: US$ gold rate was $20.67/oz× the British pound
was pegged at £4.2474/oz
¦ US$/£ rate calculation is $20.67/£4.2472 = $4.8665/£
 US gold certificate (1922)

Gold certificates were used as paper currency in the United

States from 1882 to 1933. These certificates were freely
convertible into gold coins.
¦ Because Govts agreed to buy/sell gold on
demand with anyone at its own fixed parity rate×
the value of each currency in terms of gold× the
exchange rates were therefore fixed;
¦ Countries had to maintain adequate gold
reserves to back its currency¶s value in order for
regime to function;
¦ The  
worked until the outbreak
of WW-I× which interrupted trade flows and free
movement of gold thus forcing major nations to
suspend operation of the  

The Inter-War years and WW-II× 1914-1944
± During WW-I× currencies were allowed to fluctuate over wide
ranges in terms of gold and each other× theoretically× supply
and demand for imports/exports caused moderate changes in
an exchange rate about an equilibrium value
¦ The  
has a similar function
± In 1934× the US devalued its currency to $35/oz from
$20.67/oz prior to WW-I
± From 1924 to the end of WW-II× exchange rates were
theoretically determined by each currency's value in terms of
gold.
± During WW-II and aftermath× many main currencies lost their
convertibility. The US dollar remained the only major
trading currency that was convertible
¦ Bretton Woods and the IMF× 1944
± Allied powers met in Bretton Woods× NH and
created a post-war international monetary system
± The agreement established a US dollar based
monetary system and created the IMF and World
Bank
± Under original provisions× all countries fixed their
currencies in terms of gold but were not required to
exchange their currencies
± Only the US dollar remained convertible into gold
(at $35/oz with Central banks× not individuals)
 German
British mark French
pound franc
Par
Value

U.S. dollar

Pegged at $35/oz.

Gold
± Therefore× each country established its
exchange rate vis-à-vis the US dollar and then
calculated the  


 of their
currency
± Participating countries agreed to try to
maintain the currency values within 1% of par
by buying or selling foreign or gold reserves
± Devaluation was not to be used as a
competitive trade policy× but if a currency
became too weak to defend× up to a 10%
devaluation was allowed without formal
approval from the IMF