Internation bussiness midterm.docx

Bretton woods agreement promoted the free movement of

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Bretton woods agreement promoted the free movement of capital for current account transaction Capital control: limit or alters the rate/movement of capital The BOP and exchange rate: Changes in exchange rates changes the price of import and export, then changes the quantities demanded Fixed exchange rate country: bears the responsibility to ensure BOP is near zero Floating rate-no responsibility Managed float: take action to maintain its desired exchange rate International parity condtion : link exchange rate/price level/ interest rate Price and exchange rate: p1=p2*s (purchasing power parity used)
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If the law of one price were true for all goods, the PPP exchange rare could be found from any set of price/ price can be set by ppp Absolut ppp : spot exchange rate is determined by the relative price of similar basket of goods The fisher effect – interest rates and exchange rates
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The international fisher effect predicts that with unrestricted capital flows, an investor should be indifferent between investing in dollar or yen bonds, since investors worldwide would see the same opportunity and compete it away
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Foreign exchange rate determination - Three basic approaches 1. Parity conditions 2. Balance of payment 3. Monetary and asset market approach (they are not completing theories but the complimentary theories) - More demand CAD to buy Canadian goods – CAD appreciates Foreign exchange market:
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- Transfer purchasing power between countries - Obtain/provide credit for international trade transactions - Minimize exposure to the exchange rate change risk BOP approach - Equilibrium exchange rate is achieved when outflow match inflow Monetary and asset market approach - Exchange rates are determined by supply and demand for a wide variety of assets - Change in supply and demand alter exchange rate - Changes in monetary and fiscal policy alter expectation and exchange rate Currency market intervention: - Fight inflation (strong currency) - Fight slow economic growth ( weak currency) Type: 1. Direct intervention : active buying and selling of the domestic currency against foreign currencies/hard to do now as the world’s currency markets have grown significantly 3. indirect intervention: use financial fundamentals -change in interest rate 4. currency control:restriction of access to foreign currency by government example: japan 2010 – directly buy us dollar to prevent appreciation Asian crisis – intervened directly (use reserves) and indirectly by increasing interest rate
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